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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC. 20549
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FORM 8-K
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CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported): JUNE 26, 1998
TROPICAL SPORTSWEAR INT'L CORPORATION
(Exact Name of Registrant as Specified in its Charter)
<TABLE>
<S> <C> <C>
FLORIDA 0-23161 59-3420305
(State or Other Jurisdiction (Commission File Number) (IRS Employer Identification No.)
of Incorporation)
</TABLE>
4902 WEST WATERS AVENUE
TAMPA, FLORIDA 33634-1302
(Address of Principal Executive Offices)
813-249-4900
(Registrant's telephone number, including area code)
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<PAGE> 2
ITEM 5. OTHER EVENTS.
In a press release on June 26, 1998, Tropical Sportswear Int'l
Corporation ("TSI") announced that it completed the sale of $100 million of its
11% Senior Subordinated Notes due 2008 (the "Notes"). The Notes were priced and
sold at 100% of their principal amount. The net proceeds from the offering,
together with borrowings under TSI's new credit facility, were used to repay in
full $100 million of debt under TSI's bridge financing facility. The debt under
the bridge financing facility was incurred to finance the acquisition of
Farah Incorporated ("Farah") pursuant to a tender offer for all outstanding
shares of Farah's common stock. The tender offer was consummated on June 10,
1998. Prudential Securities Incorporated acted as initial purchaser for the
transaction. The press release issued in connection therewith is filed herewith
as Exhibit 99.1. In connection with the offering of the Notes, TSI prepared an
Offering Memorandum dated June 18, 1998, certain portions of which are filed
herewith as Exhibit 99.2. The filing of this report and the inclusion of certain
portions of the Offering Memorandum herein shall not constitute an offer to sell
or the solicitation of an offer to buy the Notes.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
(a) Exhibits
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<CAPTION>
Exhibit No. Description
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<S> <C>
99.1 Press Release of Tropical Sportswear Int'l
Corporation dated June 26, 1998
99.2 Certain portions of the Offering Memorandum dated
June 18, 1998 of Tropical Sportswear Int'l
Corporation
</TABLE>
2
<PAGE> 3
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
TROPICAL SPORTSWEAR INT'L CORPORATION
(Registrant)
Date: June 26, 1998 By /s/ N. Larry McPherson
----------------------
N. Larry McPherson
Executive Vice President - Finance and
Operations
<PAGE> 4
INDEX TO EXHIBITS
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Exhibit
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<S> <C>
99.1 Press Release of Tropical Sportswear Int'l Corporation dated
June 26, 1998
99.2 Certain portions of the Offering Memorandum dated June 18,
1998 of Tropical Sportswear Int'l Corporation
</TABLE>
<PAGE> 1
EXHIBIT 99.1
PRESS RELEASE OF TROPICAL SPORTSWEAR INT'L CORPORATION DATED JUNE 26, 1998
TROPICAL SPORTSWEAR INT'L CORPORATION ANNOUNCES COMPLETION OF SENIOR
SUBORDINATED NOTES OFFERING
TAMPA, FL (June 26, 1998) - Tropical Sportswear Int'l Corporation (NASDAQ:TSIC)
("TSI") announced today that it has completed the sale of $100 million of 11%
Senior Subordinated Notes due 2008 (the "Notes"). The Notes were priced and sold
at 100% of their principal amount. The net proceeds from the offering, together
with borrowings under TSI's new credit facility, were used to repay in full $100
million of debt under TSI's bridge financing facility. The debt under the bridge
financing facility was incurred to finance the acquisition of Farah
Incorporated pursuant to a tender offer for all outstanding shares of Farah's
common stock. The tender offer was consummated on June 10, 1998.
Prudential Securities Incorporated acted as initial purchaser for the
transaction. The Notes were offered and sold pursuant to exemptions from the
registration requirements of the Securities Act of 1933 (the "Securities Act"),
have not been registered under the Securities Act and may not be offered or sold
in the United States absent registration or an applicable exemption from
registration. This communication shall not constitute an offer to sell or the
solicitation of an offer to buy the Notes.
Tropical Sportswear Int'l Corporation markets and manufactures men's and women's
sportswear including pants, jeans, shorts and shirts through all major retail
distribution channels including department and specialty stores. TSI provides
major retailers with comprehensive brand management programs and distinguishes
itself from traditional private label manufacturers by providing apparel
retailers with customer, product and market analysis, apparel design,
merchandising, and inventory forecasting through the use of state-of-the-art
technology.
<PAGE> 1
EXHIBIT 99.2
CERTAIN PORTIONS OF THE OFFERING MEMORANDUM DATED JUNE 18, 1998
OF TROPICAL SPORSWEAR INT'L CORPORATION
SUMMARY OF THE TRANSACTIONS
Pursuant to the Merger Agreement, on May 8, 1998 Foxfire commenced the
Tender Offer to purchase all of the Shares at a purchase price of $9.00 per
Share. Consummation of the Tender Offer was subject to certain conditions
including, among others, that 66-2/3% of the outstanding Shares be validly
tendered, and not withdrawn, pursuant to the Tender Offer (the "Minimum Tender
Condition"). The Tender Offer was consummated on June 10, 1998 and immediately
thereafter Foxfire was merged into Farah in the Merger. Farah was the surviving
corporation in the Merger and is a wholly-owned subsidiary of TSI. The aggregate
consideration paid to the shareholders and optionholders of Farah was
approximately $95.8 million. See "The Transactions -- Farah Acquisition."
To finance the purchase price for the Farah Acquisition, the repayment of
approximately $5.9 million and $57.9 million of debt outstanding under TSI's
existing credit facility and Farah's existing credit facility, respectively
(together, the "Existing Credit Facilities"), and the redemption of
approximately $1.7 million of Farah's 8.50% convertible subordinated debentures
due 2004 (the "Convertible Debentures"), concurrently with the consummation of
the Tender Offer the Company entered into (i) a $100.0 million bridge financing
facility (the "Bridge Facility") with Prudential Securities Credit Corp. (the
"Bridge Lender"), an affiliate of the Initial Purchaser, and (ii) a new $85.0
million revolving credit facility (the "New Credit Facility") arranged by Fleet
Capital Corporation ("Fleet"). In connection with the closing of the Offering,
the Company has entered into discussions with its lenders to increase the
borrowing availability under the New Credit Facility to $110.0 million, subject
to borrowing base limitations (the "Credit Facility Increase"). However, no
assurance can be given that the Company will obtain the Credit Facility
Increase. The Company intends to use the net proceeds from the Offering,
together with borrowings under the New Credit Facility, to repay all debt
outstanding under the Bridge Facility. See "Use of Proceeds."
The Farah Acquisition, the borrowings under the Bridge Facility and the New
Credit Facility to finance the Farah Acquisition, the repayment of the Existing
Credit Facilities, the redemption of the Convertible Debentures and the Offering
and the application of the net proceeds therefrom, are collectively referred to
herein as the "Transactions."
<PAGE> 2
The following table sets forth the estimated sources and uses of funds for
the Transactions (assuming that the Transactions occurred concurrently (and
consequently no borrowings were necessary under the Bridge Facility) on June 10,
1998).
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AMOUNT
------
(IN THOUSANDS)
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SOURCES OF FUNDS:
11% Senior Subordinated Notes due 2008.................... $100,000
New Credit Facility(1).................................... 70,397
--------
Total sources.......................................... $170,397
========
USES OF FUNDS:
Farah Acquisition......................................... $ 95,848
Repayment of Existing Credit Facilities(2)................ 63,821
Redemption of Convertible Debentures(3)................... 1,728
Estimated fees and expenses(4)............................ 9,000
--------
Total uses............................................. $170,397
========
</TABLE>
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(1) Upon consummation of the Transactions, the Company will have approximately
$14.6 million (or, assuming the Company obtains the Credit Facility
Increase, $39.6 million) of borrowing availability under the New Credit
Facility, subject to borrowing base limitations. See "Description of Other
Indebtedness -- New Credit Facility."
(2) TSI's Existing Credit Facility expires in January 1999 and, as of April 4,
1998, debt outstanding thereunder accrued interest at a weighted average
interest rate of approximately 8.5% per annum. Farah's Existing Credit
Facility expires in July 2001 and, as of February 1, 1998, debt outstanding
thereunder accrued interest at a weighted average interest rate of
approximately 8.7% per annum.
(3) The Convertible Debentures mature in February 2004 and accrue interest at a
fixed rate of 8.5% per annum.
(4) Includes (i) an aggregate of $1.0 million of fees paid to the Initial
Purchaser in its capacity as dealer manager in connection with the Tender
Offer and as financial advisor in connection with the Farah Acquisition,
(ii) the discount of $2.8 million payable to the Initial Purchaser in
connection with the Offering, (iii) fees of $500,000 paid to the Bridge
Lender in connection with the Bridge Facility, (iv) fees of $1.1 million
paid to Fleet and the other lenders in connection with the New Credit
Facility, (v) a fee of $198,000 paid under Farah's Existing Credit Facility
as a prepayment premium and (vi) estimated legal, accounting and other fees
and expenses aggregating $3.4 million payable in connection with the
Transactions.
<PAGE> 3
SUMMARY UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
The summary unaudited pro forma combined financial data give effect to the
Transactions as if they had been consummated on September 29, 1996, September
28, 1997 and March 30, 1997, in the case of the summary unaudited pro forma
combined statement of operations data for fiscal 1997 and the twenty-seven weeks
and the twelve months ended April 4, 1998, respectively, and on April 4, 1998,
in the case of the summary unaudited pro forma combined balance sheet data. The
summary unaudited pro forma combined financial data is presented for
illustrative purposes only and is not necessarily indicative of what the
Company's actual financial position or results of operations would have been had
the Transactions been consummated as of the above-referenced dates or of the
financial position or results of operations of the Company for any future
period. See "Unaudited Pro Forma Combined Financial Data."
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<CAPTION>
PRO FORMA
-------------------------------------------
TWENTY-SEVEN TWELVE MONTHS
WEEKS ENDED ENDED
FISCAL 1997 APRIL 4, 1998 APRIL 4, 1998
----------- ------------- -------------
(IN THOUSANDS, EXCEPT RATIOS)
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STATEMENT OF OPERATIONS DATA:
Net sales................................................. $425,411 $218,265 $433,625
Cost of goods sold........................................ 315,427 162,980 322,443
-------- -------- --------
Gross profit.............................................. 109,984 55,285 111,182
Selling, general and administrative expenses.............. 86,764 42,525 86,575
Termination of foreign operations......................... 5,106 6,624 6,624
Production conversion expenses............................ 2,061 642 1,789
Relocation expenses....................................... 904 1,358 1,696
-------- -------- --------
Operating income.......................................... 15,149 4,136 14,498
Interest expense, net(1).................................. 18,750 9,721 18,730
Other expense, net........................................ 231 861 447
-------- -------- --------
Loss before income tax.................................... (3,832) (6,446) (4,679)
Income tax benefit........................................ (3,802) (2,914) (4,623)
-------- -------- --------
Net (loss)................................................ $ (30) $ (3,532) $ (56)
======== ======== ========
OTHER DATA:
Depreciation and amortization(1).......................... $ 6,458 $ 5,017 $ 7,999
EBITDA(2)................................................. 28,882 16,211 31,465
Adjusted EBITDA(3)........................................ 52,082 27,811 54,665
Cash interest expense(4).................................. 18,185 9,017 18,036
Ratio of Adjusted EBITDA to cash interest expense......... 2.9x 3.1x 3.0x
Ratio of earnings to fixed charges(5)..................... -- -- --
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA
AS OF
APRIL 4, 1998
--------------
(IN THOUSANDS)
<S> <C>
BALANCE SHEET DATA:
Working capital............................................. $126,095
Total assets................................................ 280,033
Long-term debt and obligations under capital leases......... 172,563
Shareholders' equity........................................ 44,632
</TABLE>
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(1) Interest expense, net and depreciation and amortization include amortization
of debt issuance costs of $1.3 million, $909,000 and $1.3 million for fiscal
1997 and the twenty-seven weeks and twelve months ended April 4, 1998,
respectively. Interest expense, net also includes interest income of
$752,000, $204,000 and $623,000 for fiscal 1997 and the twenty-seven weeks
and the twelve months ended April 4, 1998, respectively.
<PAGE> 4
(2) EBITDA represents loss before income tax plus, without duplication, (i)
depreciation and amortization, (ii) interest expense, and (iii) special
charges incurred by Farah during the periods presented relating to the
termination of foreign operations, production conversions and/or relocation
expenses (the "Farah Charges"). EBITDA is presented because it provides
useful information regarding the Company's ability to service debt. EBITDA
should not be considered as an alternative measure of operating results or
cash flows from operations (as determined in accordance with generally
accepted accounting principles).
(3) Adjusted EBITDA represents EBITDA plus $23.2 million of annual cost savings
(or $11.6 million for the twenty-seven weeks ended April 4, 1998) that the
Company expects to achieve in connection with the Farah Acquisition assuming
that all cost savings were achieved at the beginning of the applicable
period. See "-- Expected Benefits of the Farah Acquisition -- Cost Saving."
(4) Cash interest expense reflects, for the applicable period, aggregate
interest expense during such period minus non-cash interest expense during
such period attributable to the amortization of debt issuance costs. On a
pro forma basis after giving effect to the Transactions, non-cash interest
expense would have been $1.3 million, $909,000 and $1.3 million for fiscal
1997 and the twenty-seven weeks and the twelve months ended April 4, 1998,
respectively.
(5) In calculating the ratio of earnings to fixed charges, earnings consist of
income before income taxes plus fixed charges (excluding capitalized
interest). Fixed charges consist of interest expense (which includes
amortization of deferred financing costs), whether expensed or capitalized,
and the portion of rental expense that is representative of the interest
factor. On a pro forma basis after giving effect to the Transactions,
earnings would have been insufficient to cover fixed charges by $3.9
million, $6.4 million and $4.8 million for fiscal 1997 and the twenty-seven
weeks and the twelve months ended April 4, 1998, respectively.
<PAGE> 5
RISK FACTORS
Prospective investors should carefully consider the following factors in
addition to the other information set forth in this Offering Memorandum before
making an investment in the Notes offered hereby.
Certain of the matters discussed in this Offering Memorandum may constitute
forward-looking statements for purposes of the Securities Act and the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). All statements, other
than statements of historical facts, included in this Offering Memorandum that
address activities, events or developments that TSI expects or anticipates will
or may occur in the future, including the successful implementation of TSI's and
Farah's new management information systems, the amount and nature of future
capital expenditures, business strategies and measures to implement such
strategies, competitive strengths, expansion and growth of TSI's business and
operations, references to future success, the realization of cost savings and
business synergies resulting from the Farah Acquisition and other such matters
are forward-looking statements. Such forward-looking statements may involve
uncertainties and other factors that may cause the actual results and
performance of TSI to be materially different from future results or performance
expressed or implied by such statements. Cautionary statements regarding the
risks associated with such forward-looking statements include, without
limitation, those statements set forth below and elsewhere herein. Among others,
factors that could adversely affect actual results and performance include
failure to successfully integrate Farah's operations into those of the Company
in a timely and efficient manner, the loss of a significant customer, delays in
installing or malfunctions of the Company's or Farah's new management
information systems, disruption in the operations of independent manufacturers,
political or social instability in geographic areas in which the Company's
independent manufacturers operate, changes in import and export regulations and
sudden increases in raw material or labor prices. All written or oral
forward-looking statements attributable to TSI are expressly qualified in their
entirety by the foregoing cautionary statement.
INTEGRATION OF FARAH
The Farah Acquisition will result in a significant increase in the scope of
the Company's business. Farah's net sales for fiscal 1997 were approximately
$273.7 million, while TSI's net sales for fiscal 1997 were approximately $151.7
million. Specifically, as a result of the Farah Acquisition, the Company will
significantly increase (i) the number of its branded and private brand apparel
offerings, (ii) the number of its manufacturing and other operating locations,
(iii) the number of its employees, (iv) the geographical scope of its operations
and (v) the total scale of its operations. The integration of the operations of
Farah with those of the Company, the coordination of purchasing, distribution,
manufacturing and warehousing for the combined companies, the coordination of
Farah's sales and marketing operations with those of the Company and the
implementation of appropriate financial and management systems in connection
with the Farah Acquisition will require significant financial resources and
substantial attention from the Company's management. Any inability of the
Company to successfully integrate Farah in a timely and efficient manner could
have a material adverse affect on the Company's business, results of operations
and financial condition. In addition, the Company expects to realize certain
cost savings and business synergies as a result of the Farah Acquisition.
Realization of such cost savings and business synergies could be affected by a
number of factors beyond the Company's control, such as general economic
conditions, increased operating costs, the response of competitors, customers or
employees and regulatory developments. There can be no assurance that the
Company will achieve the expected cost savings and business synergies.
SUBSTANTIAL LEVERAGE
Following consummation of the Transactions, the Company will be highly
leveraged. As of April 4, 1998, on a pro forma basis after giving effect to the
Transactions, the Company's consolidated debt would have been approximately
$176.6 million and its shareholders' equity would have been approximately $44.6
million. In addition, on a pro forma basis after giving effect to the
Transactions, the Company's earnings would have been insufficient to cover fixed
charges by approximately $4.8 million for the twelve months ended April 4, 1998.
See "Capitalization," "Description of the Notes" and "Description of Other
Indebtedness."
<PAGE> 6
The Indenture and the New Credit Facility permit the Company and its
subsidiaries to incur additional debt, subject to certain limitations. The
degree to which the Company is leveraged will have important consequences for
the holders of the Notes, including, but not limited to, the following: (i) a
substantial portion of the Company's cash flow from operations will be dedicated
to the payment of principal and interest on its debt and will not be available
for other purposes; (ii) the Company's ability to obtain additional financing in
the future for working capital, capital expenditures, acquisitions or other
purposes may be impaired; (iii) the Company's leverage may increase its
vulnerability to economic downturns and limit its ability to withstand
competitive pressures; (iv) the Company's ability to capitalize on significant
business opportunities may be limited; and (v) the Company's leverage may place
the Company at a competitive disadvantage in relation to less leveraged
competitors.
The ability of the Company to meet its debt service obligations will depend
on the future operating performance and financial results of the Company, which
will be subject in part to factors beyond the control of the Company. Although
the Company believes that its cash flow will be adequate to meet its interest
and principal payments, there can be no assurance that the Company will generate
earnings in the future sufficient to cover its fixed charges. If the Company is
unable to generate earnings in the future sufficient to cover its fixed charges
and is unable to borrow sufficient funds under either the New Credit Facility or
from other sources, it may be required to refinance all or a portion of its
existing debt (including the Notes) or to sell all or a portion of its assets.
There can be no assurance that a refinancing would be possible, nor can there be
any assurance as to the timing of any asset sales or the proceeds that the
Company could realize therefrom. In addition, the terms of the New Credit
Facility and the Indenture restrict the Company's ability to sell assets and the
use of the proceeds therefrom. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources -- Pro Forma Liquidity and Capital Resources" and "Description of
Other Indebtedness -- New Credit Facility."
If for any reason, including a shortfall in anticipated operating results
or proceeds from asset sales, the Company were unable to meet its debt service
obligations, it would be in default under the terms of the New Credit Facility.
In the event of such a default, the lenders under the New Credit Facility could
elect to declare all debt thereunder to be immediately due and payable,
including accrued and unpaid interest, and to terminate their commitments
thereunder to provide funding. In addition, such lenders could proceed against
their collateral, which consists of substantially all of the assets of the
Company. Any default under the New Credit Facility could result in a default
under the Company's other debt or result in a bankruptcy of the Company. Such
defaults would delay or preclude payment of principal of, premium, if any, and
interest on, the Notes. See "Description of the Notes -- Subordination."
ACQUISITIONS
The Company intends to pursue acquisitions as part of its business
strategy. The Company regularly evaluates acquisition opportunities that would
complement its ongoing operations. There can be no assurance that the Company
will be able to successfully identify suitable acquisition candidates, obtain
sufficient financing on acceptable terms to fund acquisitions, complete
acquisitions, integrate acquired operations into its existing operations or
profitably manage acquired businesses. Once integrated, acquired operations may
not achieve levels of revenues, profitability or productivity comparable to
those achieved by the Company's existing operations, or otherwise perform as
expected. Acquisitions may also involve a number of special risks, including,
among others, possible adverse effects on the Company's operating results,
diversion of management's attention and the Company's resources, and dependence
on retaining, hiring and training key personnel, some or all of which could have
a material adverse effect on the Company's business, results of operations and
financial condition. In addition, the Company competes for acquisition and
expansion opportunities with companies that have substantially greater resources
than the Company. Although the Company regularly evaluates acquisition
opportunities, it currently has no agreements, arrangements or understandings
with respect to any acquisitions, other than the Farah Acquisition.
<PAGE> 7
RELIANCE ON KEY CUSTOMERS
On a pro forma basis after giving effect to the Transactions, sales to the
Company's five largest customers would have represented approximately 46.1% of
net sales for the twelve months ended April 4, 1998. On a pro forma basis after
giving effect to the Transactions, sales to Wal-Mart, Federated Department
Stores and Dillard's would have accounted for approximately 17.0%, 8.3% and
8.3%, respectively, of net sales for the twelve months ended April 4, 1998. The
Company does not have long-term contracts with any of its customers, and sales
to customers generally occur on an order-by-order basis and are subject to
certain rights of cancellation and rescheduling by the customer or by the
Company. Accordingly, the level of unfilled orders at any given time may not be
indicative of eventual actual shipments. In addition, the Company's inability to
timely fulfill customer orders may materially and adversely affect the Company's
relationships with its customers. Any deterioration in the Company's
relationship with any key customers could have a material adverse effect on the
Company's business, results of operations and financial condition.
The Company's future financial condition and results of operations will
depend to a significant extent upon the commercial success of its major
customers and their continued willingness to purchase the Company's products.
Any significant downturn in the business of the Company's major customers or
their commitment to the Company's programs or brands could cause those customers
to reduce or discontinue their purchases from the Company, which could have a
material adverse effect on the Company's business, results of operations and
financial condition. See "Business -- Customers and Customer Service."
APPAREL INDUSTRY
The apparel industry has historically been subject to cyclical variations,
and a recession in the general economy or uncertainties regarding future
economic prospects that affect consumer spending habits could have a material
adverse effect on the Company's business, results of operations and financial
condition. The Company believes that its success depends in large part upon its
ability to anticipate, gauge and respond to changing consumer demands and
fashion trends in a timely manner. Failure by the Company to identify and
respond appropriately to changing consumer demands and fashion trends could
adversely affect consumer acceptance of the Company's products and may have a
material adverse effect on the Company's business, results of operations and
financial condition.
Additionally, a number of apparel retailers have experienced significant
changes and difficulties over the past several years, including consolidation of
ownership, increased centralization of buying decisions, restructurings,
bankruptcies and liquidations. During past years, various apparel retailers,
including some of the Company's customers, have experienced financial problems
that have increased the risk of extending credit to such retailers. Financial
problems with respect to any of the Company's customers could cause the Company
to reduce or discontinue business with such customers or require the Company to
assume more credit risk relating to such customers' receivables, either of which
could have a material adverse effect on the Company's business, results of
operations and financial condition. See "Business -- Industry."
COMPETITION
The apparel industry is highly competitive and TSI and Farah compete with
numerous apparel manufacturers, including brand name and private brand
producers, and retailers which have established, or may establish, internal
product development and sourcing capabilities. TSI's and Farah's products also
compete with a substantial number of designer and non-designer product lines.
Many of TSI's and Farah's competitors and potential competitors have greater
financial, manufacturing and distribution resources than TSI and Farah. Any
increased competition from manufacturers or retailers, or any increased success
by existing competition, could have a material adverse effect on the Company's
business, results of operations and financial condition. See
"Business -- Competition."
DEPENDENCE ON INTELLECTUAL PROPERTY; RISK OF INFRINGEMENT CLAIMS
TSI and Farah use a number of trademarks, certain of which TSI and Farah
have registered with the United States Patent and Trademark Office. The Company
believes these registered and common law
<PAGE> 8
trademarks and other proprietary rights are important to its success and its
competitive position. TSI and Farah experience, from time to time, challenges to
the use or registration of certain of their trademarks and use of their trade
dress. Levi Strauss & Co. recently brought suit against TSI alleging, among
other things, that a TSI trademark and the trade dress used in the labeling and
packaging of certain TSI products infringe upon certain of Levi Strauss & Co.'s
proprietary trademark and trade dress rights. The outcome of the litigation
cannot be determined at this time. Nevertheless, in an attempt to limit TSI's
liability, if any, with respect to such alleged infringement, TSI has
unilaterally altered the trademark and trade dress which are currently the
subject of this lawsuit. There can be no assurance, however, that the
modifications made to the subject trademark and trade dress do not infringe upon
Levi Strauss & Co.'s rights or that Levi Strauss & Co. will not continue to seek
to recover damages and attorneys' fees from TSI with respect to the use of this
modified trademark and trade dress, or with respect to the trademark and trade
dress prior to modification. See "Business -- Legal Proceedings." Additionally,
there can be no assurance that TSI's and Farah's other trademarks and
proprietary rights do not or will not violate the proprietary rights of others,
that they would be upheld if challenged or that TSI or Farah would not be
prevented, in any such event, from using its trademarks or other proprietary
rights, any of which could have a material adverse effect on the Company's
business, results of operations and financial condition. In the event of
litigation arising from alleged infringement, any claiming party may have
significantly greater resources than the Company to pursue such litigation, and
the Company could be forced to incur substantial costs to defend such
litigation. In addition, if any such party is successful in challenging the
Company's or Farah's trademarks or use of trade dress, the Company could be
forced to pay significant damages or required to enter into expensive royalty or
licensing arrangements with such third party. Accordingly, any such litigation
could have a material adverse effect on the Company's business, results of
operations and financial condition.
In addition, TSI and Farah use various trademarks owned by other companies
in the promotion, distribution and sale of their products pursuant to licensing
agreements. From time to time, the Company has been engaged in litigation
regarding its licensing arrangements. There can be no assurance that any of the
licensing agreements will not be terminated or will be renewed in the future. In
the event TSI and Farah are unable to use the trademarks of such other companies
in the future, the Company's business, results of operations and financial
condition may be materially adversely affected. See "Business -- Trademarks and
Licenses."
DEPENDENCE ON KEY PERSONNEL
The Company's continued success is dependent upon its ability to retain its
senior management as well as its ability to attract and retain qualified
management, administrative and sales personnel to support its existing
operations and future growth. The loss of the services of any members of its
senior management, or the inability to attract and retain other qualified
personnel, could have a material adverse effect on the Company's business,
results of operations and financial condition. See "Management."
PRICE AND AVAILABILITY OF RAW MATERIALS
The principal fabrics used in the Company's and Farah's apparel consist of
cotton, wool, synthetic and blended fabrics. These fabrics, with the quality the
Company and Farah require, are available from a limited number of suppliers. The
prices paid by the Company and Farah for such fabrics are largely dependent on
the market prices for the raw materials used to produce them, namely cotton,
wool, rayon and polyester. The price and availability of such raw materials and,
in turn, the fabrics used in the Company's and Farah's apparel may fluctuate
significantly, depending on a variety of factors, including crop yields and
weather patterns. In the event that the Company is required to obtain fabrics
from sources other than its current suppliers, the quality of available fabrics
also may fluctuate significantly. Fluctuations in the price, availability and
quality of the fabrics or other raw materials used by the Company could have a
material adverse effect on the Company's cost of sales or its ability to meet
its customers' demands and, as a result, could have a material adverse effect on
the Company's business, results of operations and financial condition. There
also can be no assurance that the Company will be able to pass along to its
customers all, or any portion of, any future increases in the prices paid for
the fabrics used in the manufacture of the Company's products. See
"Business -- Production."
<PAGE> 9
DEPENDENCE ON INDEPENDENT MANUFACTURERS
TSI and Farah use independent manufacturers to assemble or produce a
substantial portion of their respective products. The Company and Farah are
dependent upon the ability of their independent manufacturers to adequately
finance the assembly or production of goods ordered and maintain sufficient
manufacturing capacity. The use of independent manufacturers to assemble or
produce finished goods and the resulting lack of direct control could subject
the Company to difficulty in obtaining timely delivery of products of acceptable
quality. Neither the Company nor Farah generally has long-term contracts with
any independent manufacturers. Alternative manufacturers, if available, may not
be able to provide the Company with products or services of a comparable
quality, at an acceptable price or on a timely basis. There can be no assurance
that there will not be a disruption in the supply of the Company's products from
its independent manufacturers or, in the event of a disruption, that the Company
would be able to substitute in a timely manner suitable alternative
manufacturers. The failure of any independent manufacturer to perform or the
loss of any independent manufacturer could have a material adverse effect on the
Company's business, results of operations and financial condition. See
"Business -- Production."
INTERNATIONAL SOURCING AND MANUFACTURING
During fiscal 1997 and the twenty-seven weeks ended April 4, 1998, all of
TSI's products were assembled or produced by independent manufacturers operating
outside the United States, primarily in the Dominican Republic and, to a lesser
extent, Mexico. In addition, substantially all of Farah's products have
historically been assembled outside the United States, with a significant
portion of such production occurring in Mexico and Costa Rica. Accordingly, the
Company expects that after the Farah Acquisition almost all of its products will
be assembled or produced outside the United States. Generally, neither the
Company nor Farah has any long-term contracts with its independent
manufacturers. There can be no assurance that the Company will not experience
difficulties with such manufacturers, which could include a reduced availability
of production capacity, failure to meet production deadlines or increases in
manufacturing costs. In addition, the use of foreign manufacturers requires the
Company to order products further in advance to account for additional
transportation time. If the Company overestimates customer demand, it may be
required to hold goods in inventory which it may be unable to sell at historical
margins; if it underestimates customer demand, the Company may not be able to
fill orders on a timely basis.
International manufacturing is subject to a number of other risks including
work stoppages, transportation delays and interruptions, delays and
interruptions resulting from natural disasters, political instability, economic
disruptions, expropriation, nationalization, the imposition of tariffs and
import and export controls, changes in governmental policies and other events.
Any such event could have a material adverse effect on the Company's business,
results of operations and financial condition. In addition, a significant
portion of Farah's manufacturing operations are located in a number of countries
outside the United States. As a consequence, following the Farah Acquisition,
the Company will be subject to additional risks associated with owning and
operating manufacturing facilities abroad. These include, among others, the
risks of becoming subject to labor laws and other government regulations imposed
by the countries in which the Company operates. Any such adverse change could
result in loss of revenues, customer orders and customer goodwill and could have
a material adverse effect on the Company's business, results of operations and
financial condition.
The Company and Farah are also exposed to foreign currency risk. Although
TSI and, to a lesser extent Farah, have historically contracted to assemble or
produce substantially all of their goods in United States dollars, reductions in
the value of the United States dollar could increase the prices that the Company
pays for its products, which increases the Company may not be able to pass on to
its customers. Any such price increases could have a material adverse effect on
the Company's business, results of operations and financial condition. See
"Business -- Production."
IMPORTS AND IMPORT RESTRICTIONS
Substantially all of TSI's and Farah's import operations are subject to the
terms of bilateral textile agreements between the United States and a number of
countries, which agreements impose quotas on the
<PAGE> 10
amount and type of goods that can be imported into the United States from these
countries. Pursuant to international agreements and/or United States laws, these
bilateral textile agreements allow, and any future bilateral textile agreement
may allow, the United States, under certain circumstances, to impose restraints
at any time on the importation of additional or new categories of merchandise.
The Company's imported products are also subject to United States customs
duties. On a pro forma basis after giving effect to the Transactions, such
duties would have represented approximately 4.6% of the Company's cost of goods
sold for the twelve months ended April 4, 1998.
The United States and the countries in which TSI's and Farah's products are
manufactured may from time to time impose new quotas, duties, tariffs or other
restrictions or adversely adjust presently prevailing quotas, duties or tariffs.
In addition, the United States may bar imports of products that are found to
have been manufactured by convict, forced or indentured labor and may withdraw
the "most favored nation" status of certain countries, which could result in the
imposition of higher tariffs on products imported from such countries. Any such
new or adjusted restrictions could have a material adverse effect on the
Company's business, results of operations and financial condition. See
"Business -- Imports and Import Regulations."
MANAGEMENT INFORMATION SYSTEMS
TSI and Farah rely upon the accuracy and proper utilization of their
respective management information systems to provide timely distribution
services and to properly track their respective operating results. The Company
began implementation of a new, integrated management information system in the
second quarter of fiscal 1998 and continues to integrate additional functions.
The Company expects that it will need to modify its management information
systems as a result of the Farah Acquisition. Further modification and
refinement will be required as the Company grows and its business needs change.
The occurrence of a significant system failure or the Company's inability to
modify its management information systems to respond to the Farah Acquisition
and other changes in its business needs could have a material adverse effect on
the Company's business, results of operations and financial condition. See
"Business -- Management Information Systems."
CONTROL BY PRINCIPAL SHAREHOLDERS
As of May 12, 1998, William W. Compton, the Company's Chairman of the Board
and Chief Executive Officer, and Michael Kagan, the Company's Executive Vice
President and Chief Financial Officer, owned or controlled approximately 12.5%
and 7.5%, respectively, of the outstanding shares of TSI's common stock (the
"Common Stock"). As of such date, Accel, S.A. de C.V., a Mexican corporation
("Accel"), owned approximately 21.1% of the outstanding shares of the Common
Stock. In addition, pursuant to TSI's Amended and Restated Articles of
Incorporation, Accel currently has the right to nominate two persons to stand
for election to TSI's seven-member Board of Directors, and separate family
limited partnerships controlled by Messrs. Compton and Kagan, respectively, each
currently has the right to nominate one person to stand for election to TSI's
seven-member Board of Directors. Moreover, Accel and Messrs. Compton and Kagan
and their respective family limited partnerships have entered into a
shareholders' agreement pursuant to which, among other things, each of them has
agreed to vote the shares of Common Stock owned or controlled by them to elect
the nominees of the other parties to the shareholders' agreement to TSI's Board
of Directors. In light of the foregoing, such persons will effectively have the
ability to significantly influence the election of TSI's directors and the
outcome of all other issues submitted to TSI's shareholders. See "Management"
and "Principal Shareholders."
SEASONALITY
Historically, TSI's and Farah's businesses have been seasonal, with
slightly higher sales and income in their respective second and fourth fiscal
quarters, just prior to and during the two peak retail selling seasons for
spring and fall merchandise. In addition, certain of TSI's and Farah's products,
such as shorts and corduroy pants, tend to be seasonal in nature. In the event
such products represent a greater percentage of the Company's sales in the
future, the seasonality of the Company's sales may be increased.
<PAGE> 11
RANKING OF THE NOTES AND THE SUBSIDIARY GUARANTEES
The Notes and the Subsidiary Guarantees will be general unsecured
obligations of the Company and the Subsidiary Guarantors, respectively,
subordinated in right of payment to all existing and future senior debt of the
Company and the Subsidiary Guarantors, including Debt under the New Credit
Facility. As of April 4, 1998, on a pro forma basis after giving effect to the
Transactions, the Company and the Subsidiary Guarantors would have had an
aggregate of approximately $76.6 million of Debt outstanding ranking senior to
the Notes, and the Company would have had $14.6 million (or, assuming the
Company obtains the Credit Facility Increase, $39.6 million) of additional
borrowing availability under the New Credit Facility (subject to borrowing base
limitations), all of which would be Senior Debt. In the event of a bankruptcy,
liquidation or reorganization of the Company or a Subsidiary Guarantor, the
assets of the Company or such Subsidiary Guarantor would be available to pay
obligations on the Notes only after all senior debt of the Company or such
Subsidiary Guarantor, as the case may be, has been repaid in full. Consequently,
sufficient assets may not exist to pay amounts due on the Notes. In addition,
the subordination provisions of the Indenture provide that no cash payments may
be made with respect to the Notes during the continuance of a payment default
under certain Senior Debt of the Company. Furthermore, if certain nonpayment
defaults exist with respect to certain Senior Debt, the holders of such Senior
Debt would be able to prevent payments of principal of, premium, if any, and
interest on, the Notes for certain periods of time. See "Description of the
Notes -- Subordination."
None of TSI's or Farah's non-United States subsidiaries will be Subsidiary
Guarantors, and the Notes will be effectively subordinated in right of payment
to all debt and other liabilities (including trade payables) of these
subsidiaries. As of April 4, 1998, on a pro forma basis after giving effect to
the Transactions, TSI's subsidiaries that are not Subsidiary Guarantors would
have had approximately $3.8 million of accounts payable and third party debt
outstanding. The right of the Company to receive assets of any of its
subsidiaries that are not Subsidiary Guarantors upon liquidation or
reorganization of such subsidiary will be subordinated to the claims of that
subsidiary's creditors (including trade creditors), except to the extent the
Company itself is recognized as a creditor of such subsidiary. See "Description
of the Notes -- Subordination."
RESTRICTIONS IMPOSED BY THE NEW CREDIT FACILITY AND THE INDENTURE
The New Credit Facility and the Indenture will contain a number of
significant covenants which, among other things, will restrict the ability of
the Company to dispose of assets, incur additional debt, repay other debt, pay
dividends, make certain investments or acquisitions, repurchase or redeem
capital stock, engage in mergers or consolidations, or engage in certain
transactions with subsidiaries and affiliates and otherwise restrict corporate
activities. There can be no assurance that such restrictions will not adversely
affect the Company's ability to finance its future operations or capital needs
or engage in other business activities that may be in the best interest of the
Company. In addition, the New Credit Facility will also require the Company to
maintain compliance with certain financial ratios. The ability of the Company to
comply with such ratios may be affected by events beyond the Company's control.
A breach of any of these covenants or the inability of the Company to comply
with the required financial ratios could result in a default under the New
Credit Facility. In the event of such a default, the lenders under the New
Credit Facility could elect to declare all debt thereunder to be immediately due
and payable, including accrued and unpaid interest, and to terminate their
commitments thereunder to provide funding. In addition, such lenders could
proceed against their collateral, which consists of substantially all of the
assets of the Company. Any default under the New Credit Facility could result in
a default under the Company's other debt or result in a bankruptcy of the
Company. Such defaults would delay or preclude payment of principal of, premium,
if any, and interest on, the Notes. See "Description of the Notes" and
"Description of Other Indebtedness -- New Credit Facility."
LIMITATION ON SUBSIDIARY GUARANTEES; FRAUDULENT CONVEYANCE CONCERNS
The issuance of a Subsidiary Guarantee by a Subsidiary Guarantor may be
subject to review under federal or state fraudulent conveyance laws in the event
of the bankruptcy or other financial difficulty of such Subsidiary Guarantor.
Depending upon the standard applied in connection with such review, such review
could result in the debt evidenced by a Subsidiary Guarantee being voided or
subordinated to all other debt of such Subsidiary Guarantor (in addition to the
Senior Debt of such Subsidiary Guarantor to which such
<PAGE> 12
Subsidiary Guarantee is expressly subordinated), and could result in payments
previously made in respect of such Subsidiary Guarantee being returned to such
Subsidiary Guarantor.
For example, under applicable law, if a court, in a lawsuit by an unpaid
creditor or representative of creditors of a Subsidiary Guarantor, were to find
that when such Subsidiary Guarantor incurred the debt evidenced by its
Subsidiary Guarantee, such Subsidiary Guarantor (a)(i) was insolvent or was
rendered insolvent by reason of such incurrence, (ii) was engaged in a business
or transaction for which the assets remaining with such Subsidiary Guarantor
constituted unreasonably small capital or (iii) intended to incur, or believed
(or reasonably should have believed) that it would incur, debt beyond its
ability to pay such debt as it matures and (b) received less than reasonably
equivalent value or fair consideration for the incurrence of such debt, then the
Subsidiary Guarantee could be voided, or claims in respect of the Subsidiary
Guarantee could be subordinated to all other debt of such Subsidiary Guarantor.
In addition, any amounts previously paid by a Subsidiary Guarantor pursuant to a
Subsidiary Guarantee could be voided and required to be returned to such
Subsidiary Guarantor, or to a fund for the benefit of the creditors of such
Subsidiary Guarantor. The measure of insolvency for purposes of the foregoing
considerations will vary depending upon the law of the jurisdiction being
applied. Generally, however, a Subsidiary Guarantor would be considered
insolvent if (i) the sum of its debts, including contingent liabilities, is
greater than the saleable value of all of its assets at a fair valuation or if
the present fair saleable value of its assets is less than the amount that would
be required to pay its probable liability on its existing debts, including
contingent liabilities, as they become absolute and matured or (ii) it could not
pay its debts as they become due.
A court will likely find that a Subsidiary Guarantor did not receive fair
consideration or reasonably equivalent value for its guarantee to the extent
that its liability thereunder exceeds any direct benefit it received from the
issuance of the Notes. Each Subsidiary Guarantee will limit the liability of the
Subsidiary Guarantor thereunder to the maximum amount that it could pay without
the guarantee being deemed a fraudulent transfer. There can be no assurance that
this limitation will be effective. If this limitation is not effective, the
issuance of a Subsidiary Guarantee by a Subsidiary Guarantor could be deemed to
render insolvent such Subsidiary Guarantor. If this limitation is effective,
there can be no assurance that the limited amount so guaranteed would be
sufficient to pay amounts owed under the Notes and the Indenture in full.
LIMITATION ON CHANGE OF CONTROL
The Indenture requires the Company, in the event of a Change of Control, to
make an offer to purchase all outstanding Notes at a price equal to 101% of the
principal amount thereof, plus accrued and unpaid interest to the date of
repurchase. The New Credit Facility will restrict such a purchase and such an
offer would require the approval of the lenders thereunder. In addition, certain
events involving a change of control may be an event of default under the New
Credit Facility or other debt of the Company that may be incurred in the future.
Accordingly, the right of the holders of the Notes to require the Company to
repurchase the Notes may be of limited value if the Company cannot obtain the
required approval under the New Credit Facility. In addition, even if such
approval were obtained, there can be no assurance that the Company will have the
financial resources necessary to purchase the Notes upon a Change of Control.
Failure to offer to repurchase the Notes under such circumstances, however,
would constitute an event default under the Indenture. See "Description of the
Notes -- Repurchase at the Option of Holders Upon Change of Control."
LACK OF PUBLIC MARKET FOR THE NOTES; RESTRICTIONS ON RESALE
The Notes are a new issuance of securities for which there is currently no
trading market. The Notes will not be listed on any securities exchange. While
the Notes are expected to be eligible for trading in the PORTAL market, there
can be no assurance that an active trading market for the Notes will develop on
the PORTAL market or elsewhere. The Company has been advised by the Initial
Purchaser that it intends to make a market in the Notes after consummation of
the Offering; however, the Initial Purchaser is not obligated to do so, and any
such market making activities may be discontinued at any time without notice.
The Company has agreed to use its best efforts to effect a registered
Exchange Offer for the Notes. Until the Company performs its obligations under
the Registration Rights Agreement, the Notes may only be
<PAGE> 13
offered or sold pursuant to an exemption from the registration requirements of
the Securities Act and applicable state securities laws. In the event that
applicable interpretations of the staff of the Commission do not permit the
Company to effect the Exchange Offer, the Company will file a Shelf Registration
Statement covering resales of the Notes and use its best efforts to (i) cause
the Shelf Registration Statement to be declared effective under the Securities
Act and (ii) keep the Shelf Registration Statement effective until two years
after the Original Issue Date (or until one year after the Original Issue Date
if the Shelf Registration Statement is filed at the request of the Initial
Purchaser under certain circumstances). There can be no assurance, however, even
following registration of the Notes, that a trading market for the Notes or the
Exchange Notes will develop. If the Notes are traded after their initial
issuance, they may trade at a discount from their initial offering price,
depending upon prevailing interest rates, the market for similar securities, the
performance of the Company and other factors. See "Exchange Offer; Registration
Rights."
YEAR 2000
The "Year 2000 Issue" is the result of computer programs and systems having
been designed and developed to use two digits, rather than four, to define the
applicable year. As a result, these computer programs and systems may recognize
a date using "00" as the year 1900 rather than the year 2000. This could result
in a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices or engage in similar normal business activities.
The new or upgraded management information systems which TSI began
implementing in the second quarter of fiscal 1998 will, among other things,
address problems resulting from the Year 2000 Issue. The Year 2000 Issue impacts
TSI's main operating system which includes subsystems related to customer
analysis, order processing, planning, procurement, production and sales. While
the new management information system, which is Year 2000 compliant, will not be
operational until approximately the third quarter of fiscal 1999, TSI plans to
have all existing systems Year 2000 compliant by the first quarter of fiscal
1999 and plans to spend up to $500,000 for this portion of its systems upgrade.
Based on assessments made during fiscal 1996 and 1997, Farah decided to
replace its entire inventory management, warehouse distribution and order
processing systems so that those systems will be Year 2000 compliant. Farah will
utilize both internal and external resources to reprogram or replace and test
the software for Year 2000 modifications. The Company plans to complete the
inventory management and order processing portions of Farah's Year 2000 project
no later than December 31, 1998 and plans to complete the remainder of the
project by June 30, 1999. Farah incurred $1.0 million in costs attributable to
Year 2000 compliance in fiscal 1997 and expects to incur an additional $2.6
million in fiscal 1998. The majority of these costs have been and will continue
to be capitalized, as they relate to software purchases and development.
The Company and Farah are currently communicating with all significant
suppliers and large customers to determine the extent to which the Company and
Farah are vulnerable to those third parties' failure to remediate their own Year
2000 Issues. The Company believes that the modifications and conversions that it
and Farah are making and plan to make will allow it to mitigate problems
resulting from the Year 2000 Issue. However, if such modifications and
conversions are not made or are not completed timely, the Year 2000 Issue could
have a material adverse effect on the Company's business, results of operations
and financial condition.
<PAGE> 14
USE OF PROCEEDS
The net proceeds of the Offering are estimated to be $95.6 million. The
Company financed the Farah Acquisition, the repayment of the Existing Credit
Facilities and the redemption of the Convertible Debentures with borrowings of
$100.0 million under the Bridge Facility and approximately $70.4 million under
the New Credit Facility. The Company intends to use the net proceeds from the
Offering, together with borrowings under the New Credit Facility, to repay all
debt outstanding under the Bridge Facility. For a description of certain terms
of the Bridge Facility and the New Credit Facility, see "Description of Other
Indebtedness -- Bridge Facility" and " -- New Credit Facility."
The following table sets forth the estimated sources and uses of funds for
the Transactions (assuming that the Transactions occurred concurrently (and
consequently no borrowings were necessary under the Bridge Facility) on June 10,
1998).
<TABLE>
<CAPTION>
AMOUNT
------
(IN THOUSANDS)
<S> <C>
SOURCES OF FUNDS:
11% Senior Subordinated Notes due 2008.................... $100,000
New Credit Facility(1).................................... 70,397
--------
Total sources.......................................... $170,397
========
USES OF FUNDS:
Farah Acquisition......................................... $ 95,848
Repayment of Existing Credit Facilities(2)................ 63,821
Redemption of Convertible Debentures(3)................... 1,728
Estimated fees and expenses(4)............................ 9,000
--------
Total uses............................................. $170,397
========
</TABLE>
- ---------------
(1) Upon consummation of the Transactions, the Company will have approximately
$14.6 million (or, assuming the Company obtains the Credit Facility
Increase, $39.6 million) of borrowing availability under the New Credit
Facility, subject to borrowing base limitations. See "Description of Other
Indebtedness -- New Credit Facility."
(2) TSI's Existing Credit Facility expires in January 1999 and, as of April 4,
1998, debt outstanding thereunder accrued interest at a weighted average
interest rate of approximately 8.5% per annum. Farah's Existing Credit
Facility expires in July 2001 and, as of February 1, 1998, debt outstanding
thereunder accrued interest at a weighted average interest rate of
approximately 8.7% per annum.
(3) The Convertible Debentures mature in February 2004 and accrue interest at a
fixed rate of 8.5% per annum.
(4) Includes (i) an aggregate of $1.0 million of fees paid to the Initial
Purchaser in its capacity as dealer manager in connection with the Tender
Offer and as financial advisor in connection with the Farah Acquisition,
(ii) the discount of $2.8 million payable to the Initial Purchaser in
connection with the Offering, (iii) fees of $500,000 paid to the Bridge
Lender in connection with the Bridge Facility, (iv) fees of $1.1 million
paid to Fleet and the other lenders in connection with the New Credit
Facility, (v) a fee of $198,000 paid under Farah's Existing Credit Facility
as a prepayment premium and (vi) estimated legal, accounting and other fees
and expenses aggregating $3.4 million payable in connection with the
Transactions.
<PAGE> 15
CAPITALIZATION
The following table sets forth as of April 4, 1998 (i) the actual
capitalization of TSI and (ii) the pro forma capitalization of TSI after giving
effect to the Transactions. This table should be read in conjunction with
"Unaudited Pro Forma Combined Financial Data" and the Consolidated Financial
Statements of TSI and Farah, including the notes thereto, appearing elsewhere in
this Offering Memorandum.
<TABLE>
<CAPTION>
APRIL 4, 1998
-------------------
ACTUAL PRO FORMA
------- ---------
(IN THOUSANDS)
<S> <C> <C>
Short-term debt(1):
Current portion of long-term debt and obligations under
capital leases......................................... $ 1,269 $ 4,077
======= ========
Long-term debt(1):
Existing Credit Facility of TSI(2)........................ $ 5,986 $ --
New Credit Facility(3).................................... -- 55,360
Real estate loan.......................................... 9,385 9,385
11% Senior Subordinated Notes due 2008.................... -- 100,000
Other long-term debt and obligations under capital
leases................................................. 439 7,817
------- --------
Total long-term debt................................... 15,810 172,562
------- --------
Total debt........................................ 17,079 176,639
Shareholders' equity:
Preferred Stock, $.01 par value;
10,000,000 shares authorized;
no shares issued and outstanding....................... -- --
Common Stock, $.01 par value;
50,000,000 shares authorized;
7,600,000 shares issued and outstanding(4)............. 76 76
Additional paid-in capital................................ 17,270 17,270
Retained earnings......................................... 27,286 27,286
------- --------
Total shareholders' equity............................. 44,632 44,632
------- --------
Total capitalization.............................. $61,711 $221,271
======= ========
</TABLE>
- ---------------
(1) See Note 5 to the Consolidated Financial Statements of the Company and Note
3 to the Consolidated Financial Statements of Farah for a discussion of the
Company's and Farah's outstanding debt, respectively.
(2) In connection with the Transactions, all debt outstanding under the
Company's Existing Credit Facility was repaid and the Existing Credit
Facilities were replaced by the New Credit Facility. See "Use of Proceeds."
(3) Upon consummation of the Transactions, the Company will have approximately
$14.6 million (or, assuming the Company obtains the Credit Facility
Increase, $39.6 million) of borrowing availability under the New Credit
Facility, subject to borrowing base limitations. See "Description of Other
Indebtedness -- New Credit Facility."
(4) Excludes an aggregate of 405,750 shares of Common Stock issuable upon the
exercise of outstanding stock options.
<PAGE> 16
THE TRANSACTIONS
FARAH ACQUISITION
On June 10, 1998, the Farah Acquisition was consummated in accordance with
the Merger Agreement among TSI, Foxfire and Farah. Pursuant to the Merger
Agreement, on May 8, 1998 Foxfire commenced the Tender Offer to purchase all of
the Shares at a purchase price of $9.00 per Share. The aggregate consideration
paid to the shareholders and optionholders of Farah was approximately $95.8
million. The Board of Directors of Farah (the "Farah Board") unanimously
approved the Farah Acquisition, determined that the purchase price was fair to
the shareholders of Farah and recommended that all shareholders of Farah tender
their Shares pursuant to the Tender Offer.
Consummation of the Tender Offer was conditioned upon, among other things,
(i) satisfaction of the Minimum Tender Condition and (ii) the expiration or
termination of the waiting period imposed by the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended, applicable to the purchase of Shares
pursuant to the Tender Offer (which waiting period expired on June 4, 1998). The
Tender Offer expired at 12:00 Midnight, New York City time, on June 5, 1998. The
Tender Offer was consummated on June 10, 1998 and immediately thereafter Foxfire
was merged into Farah in the Merger. Farah was the surviving corporation in the
Merger and is a wholly-owned subsidiary of TSI. Certain customary covenants of
the Company contained in the Merger Agreement survived consummation of the
Merger.
BRIDGE FACILITY AND NEW CREDIT FACILITY
To finance the Farah Acquisition, the repayment of the Existing Credit
Facilities and the redemption of the Convertible Debentures, concurrently with
the consummation of the Tender Offer the Company entered into the Bridge
Facility and the New Credit Facility. The Bridge Facility provided for aggregate
borrowing availability of $100.0 million and was fully drawn upon consummation
of the Tender Offer. For a description of certain terms of the Bridge Facility,
see "Description of Other Indebtedness -- Bridge Facility."
The New Credit Facility, which replaced the Existing Credit Facilities, was
arranged by Fleet and permits revolving borrowings and letter of credit
issuances in an aggregate principal amount of $85.0 million, subject to
borrowing base limitations. The New Credit Facility has a term of five years. In
connection with the closing of the Offering, the Company has entered into
discussions with its lenders to obtain the Credit Facility Increase, which the
Company expects will increase the borrowing availability under the New Credit
Facility to $110.0 million, subject to borrowing base limitations. However, no
assurance can be given that the Company will obtain the Credit Facility
Increase. For a description of certain terms of the New Credit Facility, see
"Description of Other Indebtedness -- New Credit Facility."
<PAGE> 17
SELECTED HISTORICAL FINANCIAL INFORMATION OF TSI
The selected consolidated financial data of TSI set forth below for, and as
of the end of, fiscal 1993, 1994, 1995, 1996 and 1997, and for, and as of the
end of, the twenty-six weeks ended March 29, 1997 and the twenty-seven weeks
ended April 4, 1998, have been derived from the consolidated financial
statements of TSI, of which (i) the consolidated financial statements of TSI
for, and as of the end of, fiscal 1995, 1996 and 1997, the twenty-six weeks
ended March 29, 1997 and the twenty-seven weeks ended April 4, 1998 are included
elsewhere in this Offering Memorandum, (ii) the consolidated financial
statements for, and as of the end of, fiscal 1993, 1994, 1995, 1996 and 1997
were audited by Ernst & Young LLP, independent auditors, and (iii) the
consolidated financial statements for, and as of the end of, the twenty-six
weeks ended March 29, 1997 and the twenty-seven weeks ended April 4, 1998 are
unaudited. In the opinion of management, the consolidated financial statements
for, and as of the end of, the twenty-six weeks ended March 29, 1997 and the
twenty-seven weeks ended April 4, 1998 include all adjustments, consisting only
of normal recurring adjustments, necessary for a fair presentation of the
results of operations for, and the financial position at the end of, each of
such periods. The results of operations for the twenty-seven weeks ended April
4, 1998 are not necessarily indicative of the results to be expected for fiscal
1998 or any future period. The selected consolidated financial data below is
qualified in its entirety by, and should be read in conjunction with,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Company's Consolidated Financial Statements, including the
notes thereto, appearing elsewhere in this Offering Memorandum.
<TABLE>
<CAPTION>
TWENTY- TWENTY-
SIX SEVEN
WEEKS WEEKS
FISCAL YEAR ENDED ENDED
--------------------------------------------------- MARCH 29, APRIL 4,
1993 1994 1995 1996 1997 1997 1998
------- -------- -------- -------- -------- --------- --------
(IN THOUSANDS, EXCEPT RATIOS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net sales.................. $74,271 $100,359 $110,064 $117,355 $151,692 $71,359 $82,467
Cost of sales.............. 57,726 75,677 87,858 91,132 115,637 54,590 62,696
------- -------- -------- -------- -------- ------- -------
Gross profit............... 16,545 24,682 22,206 26,223 36,055 16,769 19,771
Selling, general and
administrative
expenses................. 11,071 14,291 15,060 15,189 19,443 9,623 11,360
------- -------- -------- -------- -------- ------- -------
Operating income........... 5,474 10,391 7,146 11,034 16,612 7,146 8,411
Interest expense, net(1)... 1,644 2,115 3,160 2,498 2,899 1,439 793
Factoring expense.......... 463 668 708 373 505 342 393
Other expense (income),
net...................... 1,053 (983) 293 247 32 (62) (4)
------- -------- -------- -------- -------- ------- -------
Income before income
taxes.................... 2,314 8,591 2,985 7,916 13,176 5,427 7,229
Income taxes............... 946 3,613 825 2,745 4,907 1,958 2,671
------- -------- -------- -------- -------- ------- -------
Net income................. $ 1,368 $ 4,978 $ 2,160 $ 5,171 $ 8,269 $ 3,469 $ 4,558
======= ======== ======== ======== ======== ======= =======
OTHER DATA:
Depreciation and
amortization............. $ 589 $ 953 $ 1,226 $ 1,431 $ 2,121 $ 938 $ 1,267
EBITDA(2).................. 4,554 11,670 7,382 11,885 18,232 7,819 9,336
Cash interest expense...... 1,644 2,115 3,160 2,498 2,899 1,439 793
Ratio of earnings to fixed
charges(3)............... 2.2x 4.5x 1.9x 3.7x 5.2x 4.3x 8.9x
BALANCE SHEET DATA:
Working capital............ $ 4,714 $ 23,600 $ 31,655 $ 25,483 $ 30,234 $10,620 $39,502
Total assets............... 41,522 52,023 55,237 63,415 69,658 79,448 79,909
Long-term debt and
obligations under capital
leases................... 1,677 20,973 27,175 24,162 24,055 9,277 15,810
Stockholders' equity....... 6,073 11,050 13,211 18,382 26,651 21,874 44,632
</TABLE>
<PAGE> 18
- ---------------
(1) Includes interest income of approximately $7,000, $11,000, $11,000, $40,000,
$36,000, $15,000 and $47,000 for fiscal 1993, 1994, 1995, 1996, 1997, the
twenty-six weeks ended March 29, 1997 and the twenty-seven weeks ended April
4, 1998, respectively.
(2) EBITDA represents income before income taxes plus, without duplication, (i)
depreciation and amortization and (ii) interest expense. EBITDA is presented
because it provides useful information regarding the Company's ability to
service debt. EBITDA should not be considered as an alternative measure of
operating results or cash flows from operations (as determined in accordance
with generally accepted accounting principles).
(3) In calculating the ratio of earnings to fixed charges, earnings consist of
income before income taxes plus fixed charges (excluding capitalized
interest). Fixed charges consist of interest expense (which includes
amortization of debt issuance costs), whether expensed or capitalized, and
the portion of rental expense that is representative of the interest factor.
<PAGE> 19
SELECTED HISTORICAL FINANCIAL INFORMATION OF FARAH
The selected consolidated financial data of Farah set forth below for, and
as of the end of, fiscal 1993, 1994, 1995, 1996 and 1997, and for, and as of the
end of, the thirteen weeks ended February 2, 1997 and February 1, 1998, have
been derived from the consolidated financial statements of Farah, of which (i)
the consolidated financial statements of Farah for, and as of the end of, fiscal
1995, 1996 and 1997 and the thirteen weeks ended February 2, 1997 and February
1, 1998 are included elsewhere in this Offering Memorandum, (ii) the
consolidated financial statements for, and as of the end of, fiscal 1993, 1994
and 1995 were audited by Arthur Andersen LLP, independent public accountants,
(iii) the consolidated financial statements for, and as of the end of, fiscal
1996 and 1997 were audited by Coopers & Lybrand L.L.P., independent accountants,
and (iv) the consolidated financial statements for, and as of the end of, the
thirteen weeks ended February 2, 1997 and February 1, 1998 are unaudited. In the
opinion of management, the financial statements for, and as of the end of, the
thirteen weeks ended February 2, 1997 and February 1, 1998 include all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the results of operations for, and the financial position
at the end of, each of such periods. The results of operations for the thirteen
weeks ended February 1, 1998 are not necessarily indicative of the results to be
expected for fiscal 1998 or any future period. The selected consolidated
financial data below is qualified in its entirety by, and should be read in
conjunction with, "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and Farah's Consolidated Financial Statements,
including the notes thereto, appearing elsewhere in this Offering Memorandum.
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED
FISCAL YEAR -------------------------
---------------------------------------------------- FEBRUARY 2, FEBRUARY 1,
1993 1994 1995 1996 1997 1997 1998
-------- -------- -------- -------- -------- ----------- -----------
(IN THOUSANDS, EXCEPT RATIOS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net sales................ $180,114 $242,775 $240,797 $247,598 $273,719 $ 61,938 $ 59,044
Cost of sales............ 127,020 172,300 185,822 183,540 199,790 44,230 43,140
-------- -------- -------- -------- -------- -------- --------
Gross profit............. 53,094 70,475 54,975 64,058 73,929 17,708 15,904
Selling, general and
administrative
expenses............... 47,372 58,294 68,002 62,189 66,436 16,001 14,075
Termination of foreign
operations............. -- -- -- -- 5,106 2,462 3,980
Production conversion
expenses............... 4,000 -- -- -- 2,061 272 --
Relocation expenses...... -- -- -- -- 904 -- 792
-------- -------- -------- -------- -------- -------- --------
Operating income
(loss)................. 1,722 12,181 (13,027) 1,869 (578) (1,027) (2,943)
Interest expense,
net(1)................. 1,452 1,756 3,726 3,231 3,392 516 1,169
Other (income), net...... (166) (680) (1,477) (11,099) (342) (153) (73)
-------- -------- -------- -------- -------- -------- --------
Income (loss) before
income taxes........... 436 11,105 (15,276) 9,737 (3,628) (1,390) (4,039)
Income taxes (benefit)... 304 300 (2,335) 2,981 (3,898) 565 (969)
-------- -------- -------- -------- -------- -------- --------
Net income (loss)........ $ 132 $ 10,805 $(12,941) $ 6,756 $ 270 $ (1,955) $ (3,070)
======== ======== ======== ======== ======== ======== ========
OTHER DATA:
Depreciation and
amortization........... $ 654 $ 934 $ 1,988 $ 864 $ 2,135 $ (36) $ 1,176
EBITDA(2)................ 6,542 13,795 (9,562) 13,832 9,970 1,824 3,078
Ratio of earnings to
fixed
charges(3)............. 1.1x 3.2x -- 2.4x 0.5x 0.2x --
BALANCE SHEET DATA:
Working capital.......... $ 33,979 $ 67,384 $ 49,008 $ 58,531 $ 56,063 $ 54,836 $ 51,277
Total assets............. 118,891 158,051 173,827 153,863 175,592 149,624 167,094
Long-term debt........... 1,179 5,170 12,568 4,706 13,771 4,919 15,083
Stockholders' equity..... 43,425 85,961 73,970 82,140 82,714 79,454 79,324
</TABLE>
<PAGE> 20
- ---------------
(1) Includes interest income of approximately $723,000, $723,000, $901,000,
$834,000, $716,000, $191,000 and $30,000 for fiscal 1993, 1994, 1995, 1996,
1997 and the thirteen weeks ended February 2, 1997 and February 1, 1998,
respectively.
(2) EBITDA represents income (loss) before income taxes plus, without
duplication, (i) depreciation and amortization, (ii) interest expense and
(iii) the Farah Charges for the periods presented. EBITDA is presented
because it provides useful information regarding Farah's ability to service
debt. EBITDA should not be considered as an alternative measure of operating
results or cash flows from operations (as determined in accordance with
generally accepted accounting principles).
(3) In calculating the ratio of earnings to fixed charges, earnings consist of
income before income taxes plus fixed charges (excluding capitalized
interest). Fixed charges consist of interest expense (which includes
amortization of debt issuance costs), whether expensed or capitalized, and
the portion of rental expense that is representative of the interest factor.
For fiscal 1995 and the thirteen weeks ended February 1, 1998, earnings were
insufficient to cover fixed charges by $15.3 million and $4.0 million,
respectively.
<PAGE> 21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the Consolidated Financial Statements of TSI and Farah, including the notes
thereto, appearing elsewhere in this Offering Memorandum.
GENERAL
On May 1, 1998, TSI entered into the Merger Agreement with Farah and
Foxfire, a wholly-owned subsidiary of TSI, pursuant to which Foxfire commenced
the Tender Offer to purchase all of the outstanding Shares. The Tender Offer was
consummated on June 10, 1998 and immediately thereafter Foxfire was merged into
Farah in the Merger. Farah was the surviving corporation in the Merger and is a
wholly-owned subsidiary of the Company. The combination of TSI and Farah will
create one of the largest marketers and manufacturers of apparel in the United
States. The Company will operate the existing businesses of TSI and Farah on a
combined basis under a new capital structure. Accordingly, the financial
condition and results of operations of the Company after consummation of the
Farah Acquisition will not be directly comparable to the historical financial
condition or results of operations of TSI or Farah on a stand alone basis. See
"Capitalization" and "Unaudited Pro Forma Combined Financial Data."
As part of its integration plan for the Farah Acquisition, the Company
believes that it can achieve at least $23.2 million of annual cost savings by
the end of fiscal 1999. These cost savings include (i) a reduction of selling,
general and administrative expenses resulting in approximately $2.5 million of
annual cost savings (including distribution expenses), (ii) the realization of
production efficiencies resulting in approximately $15.2 million of annual cost
savings and (iii) improvements in inventory management resulting in
approximately $5.5 million of annual cost savings. In addition, following the
Farah Acquisition, the Company intends to evaluate Farah's assets in light of
TSI's strategic and financial objectives and, to the extent such assets do not
fit within those objectives, dispose of or discontinue operating such assets.
The Company is currently considering its alternatives with respect to the Farah
International and Savane Direct businesses. In addition, the Company intends to
close the remainder of Farah's sewing operations in San Jose, Costa Rica. There
can be no assurance that any such disposition or closure will be consummated.
See "Business -- Integration Plan -- Potential Divestiture Opportunities."
The retail market experienced a down cycle during calendar 1995. Like many
other categories of retail products during this period, the apparel industry
suffered from weak customer demand and many apparel manufacturers incurred
higher than normal order cancellations. This weak apparel retail environment
caused TSI and Farah to offer products below normal selling prices and, in some
cases, below cost. This resulted in only small sales increases from fiscal 1995
to fiscal 1996 for both TSI and Farah. In addition, both TSI's and Farah's gross
margins weakened in fiscal 1995 but improved during fiscal 1996. A recovery in
the retail market began early in calendar 1996, and the Company believes that
market conditions returned to historical levels in calendar 1997.
In response to these difficult market conditions and their negative impact
on the Company's business, the Company initiated a capital investment program
and operating system and procedure enhancements designed to improve production
efficiencies, lower production costs and reduce inventory risks. As a result,
TSI has reduced its production cycle from 43 days in fiscal 1995 to 38 days in
fiscal 1997, and has reduced average inventory from 94 days of net sales in
fiscal 1995 to 70 days in fiscal 1997, while improving customer service and
customer order execution.
TSI and Farah produce similar products and use similar production
operations. Because Farah principally markets branded products, the Company
expects that it will realize higher average unit selling prices and higher gross
margins on sales of Farah products than sales of TSI's private brands. However,
Farah's branded programs generally require higher selling, marketing,
advertising and customer service costs as a percentage of net sales to generate
retailer and consumer awareness of, and demand for, its brands. Because of the
similarity of TSI's and Farah's product lines, the Company believes that cost of
goods sold for Farah products will generally be comparable to TSI's.
<PAGE> 22
RESULTS OF OPERATIONS FOR TSI
The following table sets forth, for the periods indicated, selected items
in the Company's consolidated statements of operations expressed as a percentage
of net sales:
<TABLE>
<CAPTION>
TWENTY-SIX TWENTY-SEVEN
WEEKS WEEKS
FISCAL YEAR ENDED ENDED
--------------------- MARCH 29, APRIL 4,
1995 1996 1997 1997 1998
----- ----- ----- ---------- ------------
<S> <C> <C> <C> <C> <C>
Net sales..................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold............................ 79.8 77.7 76.2 76.5 76.0
----- ----- ----- ----- -----
Gross profit.................................. 20.2 22.3 23.8 23.5 24.0
Selling, general and administrative
expenses.................................... 13.7 12.9 12.8 13.5 13.8
----- ----- ----- ----- -----
Operating income.............................. 6.5 9.4 11.0 10.0 10.2
Interest expense.............................. 2.9 2.1 1.9 2.0 0.9
Factoring expense............................. 0.6 0.3 0.3 0.5 0.5
Other (income) expense, net................... 0.3 0.3 0.1 (0.1) 0.1
----- ----- ----- ----- -----
Income before income taxes.................... 2.7 6.7 8.7 7.6 8.7
Provision for income taxes.................... 0.7 2.3 3.2 2.7 3.2
----- ----- ----- ----- -----
Net income............................... 2.0% 4.4% 5.5% 4.9% 5.5%
===== ===== ===== ===== =====
</TABLE>
TWENTY-SEVEN WEEKS ENDED APRIL 4, 1998 COMPARED TO TWENTY-SIX WEEKS ENDED
MARCH 29, 1997
Net Sales. Net sales increased 15.6% to $82.5 million in the first half of
fiscal 1998 from $71.4 million in the first half of fiscal 1997. This increase
was primarily due to a 14.0% increase in unit shipments and a 1.0% increase in
the average selling price per unit due to a change in the mix of products sold.
Additionally, the volume of returns and sales allowances decreased from prior
year levels.
Gross Profit. Gross profit increased 17.9% to $19.8 million in the first
half of fiscal 1998, or 24.0% of net sales, from $16.8 million in the first half
of fiscal 1997, or 23.5% of net sales. This increase resulted from a change in
product mix to higher-margin styles and a decrease in returns and sales
allowances.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 18.1% to $11.4 million in the first half of
fiscal 1998, or 13.8% of net sales, from $9.6 million in the first half of
fiscal 1997, or 13.5% of net sales. In addition to the higher sales and
distribution costs driven by increased sales volume, these expenses increased as
a percentage of sales due to higher levels of marketing, promotional and
merchandising expenditures and increased labor costs in the distribution area.
Interest Expense. Interest expense decreased 44.9% to $793,000 in the
first half of fiscal 1998 from $1.4 million in the first half of fiscal 1997.
The decrease was due to lower average outstanding borrowings during the first
half of fiscal 1997. The net proceeds from the Company's October 1997 initial
public offering of four million shares of Common Stock were partially used to
repay debt outstanding under the Company's Existing Credit Facility.
Income Taxes. The Company's effective income tax rate for the first half
of fiscal 1998 was 36.9% compared to 36.1% in the comparable period of fiscal
1997. These rates are based on the Company's expected effective annual tax rate.
The increase is due to the Company receiving the remaining benefit in fiscal
1997 of previously non-deductible losses from a foreign subsidiary. In fiscal
1998, more of the Company's income is expected to be taxed at a higher statutory
rate.
Net Income. As a result of the above factors, net income increased 31.4%
to $4.6 million in the first half of fiscal 1998, or 5.5% of net sales, from
$3.5 million in the first half of fiscal 1997, or 4.9% of net sales.
<PAGE> 23
FISCAL 1997 COMPARED TO FISCAL 1996
Net Sales. Net sales increased 29.3% to $151.7 million in fiscal 1997 from
$117.4 million in fiscal 1996. This increase was attributable to a 27.0%
increase in the number of units shipped and a 2.0% increase in the average
selling price per unit. These increases were primarily the result of increased
market penetration and brand acceptance.
Gross Profit. Gross profit increased 37.5% to $36.1 million in fiscal
1997, or 23.8% of net sales, from $26.2 million in fiscal 1996, or 22.3% of net
sales. The increase in gross margin resulted primarily from a significant
reduction in the level of markdowns. During the first several weeks of fiscal
1996, a significant number of orders were canceled due to the soft retail market
experienced by most major retailers. In an effort to control the cost of rising
inventories and in anticipation of a continued weak retail market, the Company
sold products below its normal selling prices and, in some cases, below its
cost. Also, the Company recorded additional markdown allowances for any
remaining excess inventory. During the latter part of fiscal 1996, the retail
market strengthened and the level of markdowns decreased significantly. This
trend continued during fiscal 1997 and the gross margin returned to historical
levels. Concurrent with the improvement in the retail market, the Company
initiated a capital investment program and operating system and procedure
enhancements designed to improve production efficiencies, lower production costs
and reduce inventory risks.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 28.0% to $19.4 million in fiscal 1997, or
12.8% of net sales, from $15.2 million in fiscal 1996, or 12.9% of net sales.
The increase in selling, general and administrative expenses was principally due
to the overall increase in the level of operations of the Company. The principal
components of the increase included $590,000 in distribution center labor,
$370,000 in depreciation and occupancy costs related to the Company's new
distribution center, $520,000 in commissions and selling costs, $450,000 in
information technology costs, $515,000 in merchandising costs, $330,000 in
certain legal expenses and $330,000 in bad debts related to a customer
bankruptcy.
Interest Expense. Interest expense increased 16.1% to $2.9 million in
fiscal 1997 from $2.5 million in fiscal 1996. The increase in interest expense
was the result of higher average outstanding borrowings during fiscal 1997 to
support greater working capital needs attributable to increased sales volume and
to finance capital expenditures, offset in part by a lower average interest rate
due to a renegotiation of the Company's Existing Credit Facility in November
1996.
Factoring Expense. Factoring expense increased 35.4% to $505,000 in fiscal
1997 from $373,000 in fiscal 1996, or 0.3% of net sales for both fiscal years.
Income Taxes. The Company's effective income tax rate for fiscal 1997 was
37.2% compared to 34.7% in fiscal 1996. The increase in the effective rate for
fiscal 1997 was primarily due to the Company receiving in fiscal 1996 a benefit
for previously unrecognized losses of an international subsidiary, which was
closed in fiscal 1995.
Net Income. As a result of the above factors, net income increased 59.9%
to $8.3 million in fiscal 1997, or 5.5% of net sales, from $5.2 million fiscal
1996, or 4.4% of net sales.
FISCAL 1996 COMPARED TO FISCAL 1995
Net Sales. Net sales increased 6.6% to $117.4 million in fiscal 1996 from
$110.1 million in fiscal 1995. This increase was primarily the result of a 5.8%
increase in the average selling price per unit. The provision for returns and
allowances was $3.0 million in fiscal 1996 and $3.1 million for fiscal 1995.
During the last three quarters of fiscal 1996, the retail market strengthened
and the Company was able to significantly reduce the level of markdowns and
close out sales experienced during fiscal 1995 and the first quarter of fiscal
1996.
Gross Profit. Gross profit increased 18.1% to $26.2 million in fiscal
1996, or 22.3% of net sales, from $22.2 million in fiscal 1995, or 20.2% of net
sales. The increase in gross margin was primarily attributable to an increase in
the average selling price per unit without a corresponding increase in the
average cost per unit. As a result of a progressive weakening of the retail
market in 1995, the Company sold selected products at selling
<PAGE> 24
prices below normal sales prices. These markdowns were concentrated in the first
quarter of fiscal 1996 when a significant number of orders was canceled. In
limited cases, to control the costs of rising inventories, the Company sold
products at prices that were below its costs. Also, the Company recorded
additional markdown allowances for any remaining excess inventory. The provision
recorded by the Company for such losses increased from $468,000 in fiscal 1995
to $798,000 in fiscal 1996. In addition, during fiscal 1995, the Company
incurred increased labor expense, including significant overtime, due to a shift
toward smaller individual orders from customers seeking to minimize retail
inventories during the industry down cycle. During the latter part of fiscal
1996, order sizes returned to historical levels, which increased the average
order size and led to a favorable impact on gross profit.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to $15.2 million in fiscal 1996, or 12.9% of
net sales, from $15.1 million in fiscal 1995, or 13.7% of net sales. Selling,
general and administrative expenses as a percentage of net sales decreased
slightly due to the Company's ability to leverage certain fixed overhead costs
against the increased level of sales.
Interest Expense. Interest expense decreased 20.9% to $2.5 million in
fiscal 1996 from $3.2 million in fiscal 1995. The decrease was due principally
to lower average outstanding borrowings resulting from the reduction of working
capital requirements, caused primarily by the reduction in average inventory
levels throughout the year.
Factoring Expense. Factoring expense decreased 47.3% to $373,000 in fiscal
1996, or 0.3% of net sales, from $708,000 in fiscal 1995, or 0.6% of net sales.
The decrease was primarily the result of a more favorable factoring arrangement
entered into in October 1995.
Income Taxes. The Company's effective income tax rate for fiscal 1996 was
34.7% compared to 27.6% in fiscal 1995. The lower effective rate during fiscal
1995 was primarily the result of the Company receiving the benefit of previously
unrecognized losses of an international subsidiary. The company decided to cease
the operations of this subsidiary in September 1995. Prior to this decision,
these losses were not deductible for United States income tax purposes.
Net Income. As a result of the above factors, net income increased 139.4%,
to $5.2 million in fiscal 1996, or 4.4% of net sales, from $2.2 million fiscal
1995, or 2.0% of net sales.
RESULTS OF OPERATIONS FOR FARAH
The following table sets forth, for the periods indicated, selected items
in Farah's consolidated statements of operations expressed as a percentage of
net sales:
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED
FISCAL YEAR --------------------------
----------------------- FEBRUARY 2, FEBRUARY 1,
1995 1996 1997 1997 1998
----- ----- ----- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net sales:
Farah U.S.A. .............................. 73.5% 73.8% 75.7% 76.7% 75.7%
Farah International........................ 19.7 19.4 18.1 16.8 16.6
Savane Direct.............................. 6.8 6.8 6.2 6.5 7.7
----- ----- ----- ----- -----
Total net sales.............................. 100.0 100.0 100.0 100.0 100.0
===== ===== ===== ===== =====
Cost of sales................................ 77.2 74.1 73.0 71.4 73.1
----- ----- ----- ----- -----
Gross profit................................. 22.8 25.9 27.0 28.6 26.9
Selling, general and administrative
expenses................................... 28.2 25.1 24.3 25.9 23.8
Termination of foreign operations............ -- -- 1.8 4.0 6.7
Production conversion expenses............... -- -- 0.8 0.4 --
Relocation expenses.......................... -- -- 0.3 -- 1.3
----- ----- ----- ----- -----
Operating income (loss).................... (5.4) 0.8 (0.2) (1.7) (4.9)
Other expense (income), net.................. (0.9) 3.1 (1.1) (0.6) (1.9)
----- ----- ----- ----- -----
Income (loss) before income taxes.......... (6.3) 3.9 (1.3) (2.3) (6.8)
Income tax expense (benefit)................. (0.9) 1.2 (1.4) 0.9 (1.6)
----- ----- ----- ----- -----
Net income (loss).......................... (5.4)% 2.7% 0.1% (3.2)% (5.2)%
===== ===== ===== ===== =====
</TABLE>
<PAGE> 25
QUARTER ENDED FEBRUARY 1, 1998 COMPARED TO QUARTER ENDED FEBRUARY 2, 1997
Net Sales. Net sales decreased 4.7% to $59.0 million in the first quarter
of fiscal 1998 from $61.9 million in the first quarter of fiscal 1997. Sales of
Farah U.S.A. decreased 6.0%, to $44.7 million in the first quarter of fiscal
1998 from $47.5 million in the first quarter of fiscal 1997. This decrease was
primarily a result of an 8.0% decrease in unit sales due primarily to production
delays and lower than normal orders following a poor Christmas retail selling
season. This decrease was partially offset by a 2.2% increase in the average
unit sales price. On a comparative basis from the first quarter of fiscal 1997
to the first quarter of fiscal 1998, sales of Savane(R) products decreased 3.8%,
sales of John Henry(R) products increased 61.5%, sales of Farah(R) label
products increased 4.9%, respectively and sales of private label products
decreased 33.6%.
Net sales of Farah International decreased 5.7% to $9.8 million in the
first quarter of fiscal 1998 from $10.4 million in the first quarter of fiscal
1997. This decrease was primarily due to a 10.0% decrease in the average unit
sales prices in the first quarter of fiscal 1998 which was partially offset by a
4.8% increase in unit sales. The decrease in average unit sales prices was due
to a decrease in concession sales which generate higher per unit sales prices
and a weakening of the Australian and New Zealand currencies in relation to the
United States dollar.
Net sales of Savane Direct increased 13.4% to $4.6 million in the first
quarter of fiscal 1998 from $4.0 million in the first quarter of fiscal 1997.
This increase was primarily due to a 7.5% increase in same store sales in the
first quarter of fiscal 1998, as well as a 6.8% increase in average price per
unit. The increase in average selling price per unit was generated by closing
unprofitable stores, opening new stores in more attractive retail locations and
a shift in the Savane(R) product mix to a higher proportion of first quality
merchandise.
Gross Profit. Gross profit decreased 10.2% to $15.9 million in the first
quarter of fiscal 1998, or 26.9% of net sales, from $17.7 million in the first
quarter of fiscal 1997, or 28.6% of net sales. Gross profit of Farah U.S.A.
decreased 18.6%, to $10.2 million in the first quarter of fiscal 1998, or 22.9%
of net sales, from $12.6 million in the first quarter of fiscal 1997, or 26.4%
of net sales. This decrease in gross profit at Farah U.S.A. was primarily due to
an increase in the percentage of Farah(R) label products included in total unit
sales, which are typically sold for lower prices than other Farah products.
Gross profit also decreased during the first quarter of fiscal 1998 as a result
of higher markdown expenses.
Gross profit of Farah International increased 7.6% to $3.5 million in the
first quarter of fiscal 1998, or 36.0% of net sales, from $3.3 million in the
first quarter of fiscal 1997, or 31.5% of net sales. This increase was due
primarily to the shift in production of Farah International products to outside
contractors and the corresponding reduction in production expenses which reduced
the average cost per unit.
Gross profit of Savane Direct increased 15.3% to $2.1 million in the first
quarter of fiscal 1998, or 47.2% of net sales, from $1.9 million in the first
quarter of fiscal 1997, or 46.4% of net sales. This increase was primarily due
to a shift in Savane Direct product mix to a higher proportion of first quality
merchandise.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased 11.9% to $14.1 million in the first quarter of
fiscal 1998, or 24.5% of net sales, from $16.0 million in the first quarter of
fiscal 1997, or 25.9% of net sales. This decrease was primarily attributable to
a decrease in advertising and other selling costs, as well as a decrease in
professional fees, outside services and freight expenses at Farah U.S.A. and
Farah International. In addition, cost savings were realized from the closing of
Farah's Irish operations.
Termination of Foreign Operations. During the first quarter of fiscal
1998, Farah decided to close its finishing facility in Cartago, Costa Rica, and
reduce sewing operations in its San Jose, Costa Rica facility. Farah recorded a
pre-tax charge of $4.0 million in the first quarter of fiscal 1998 on the
write-down of its Costa Rican assets to expected realizable value and the
accrual of severance payments and other closing expenses.
On January 5, 1997, certain inventory and manufacturing equipment at
Farah's Galway, Ireland facility were either destroyed or damaged by fire. As a
result of the fire and its related impact, Farah recorded a charge of $2.5
million (net of insurance proceeds) in the first quarter of fiscal 1997. This
amount has been classified as "Termination of foreign operations" in the first
quarter of fiscal 1997. The Company recognized
<PAGE> 26
an additional pre-tax loss of $2.6 million in the fourth quarter of fiscal 1997
in connection with the closure of its Irish facilities.
Relocation Expenses. Farah recently completed the move of its finished
goods inventory to its new distribution center which resulted in duplicate
operating costs, moving expenses, costs associated with the testing and
modification of systems and procedures, and professional fees of $792,000 in the
first quarter of fiscal 1998.
Income Taxes. Farah recorded a tax benefit resulting from a loss in the
first quarter of fiscal 1998 and tax expense resulting from a loss in the first
quarter of fiscal 1997. Farah's effective tax rates for the first quarter of
fiscal 1998 and the first quarter of fiscal 1997 were 24.0% and (40.6%),
respectively. Farah's effective tax rate varies due to the different tax rates
in countries in which Farah conducts its business.
Net Income. As a result of the above factors, net losses increased 56.3%,
to a loss of $3.1 million in the first quarter of fiscal 1998, from a loss of
$2.0 million in the first quarter of fiscal 1997.
FISCAL 1997 COMPARED TO FISCAL 1996
Net Sales. Net sales increased 10.5% to $273.7 million in fiscal 1997 from
$247.6 million in fiscal 1996. Net sales of Farah U.S.A. increased 13.4%, to
$207.2 million in fiscal 1997 from $182.8 million in fiscal 1996. This increase
was primarily due to a 12.1% increase in unit sales and a 1.1% increase in
average sales price per unit. On a comparative basis from fiscal 1996 to fiscal
1997, sales of Savane(R) products increased 18.0%, sales of John Henry(R)
products increased 54.1%, sales of Farah(R) label products increased 25.0% and
sales of private label products decreased 15.4%.
Net sales of Farah International increased 3.4% to $49.7 million in fiscal
1997 from $48.0 million in fiscal 1996. Unit sales and the average selling price
per unit increased 2.4% and 1.0%, respectively, at Farah International in fiscal
1997.
Net sales of Savane Direct remained flat at $16.8 million in both fiscal
1997 and fiscal 1996. Same store sales increased 4.1% in fiscal 1997 compared to
fiscal 1996. The average sales price per unit at Savane Direct increased 20.1%
in fiscal 1997, while unit sales decreased 16.7%. These changes were primarily
due to the relocation of unprofitable stores in better locations and the
inclusion of a higher proportion of first quality products in such stores.
Gross Profit. Gross profit increased 15.4% to $73.9 million in fiscal
1997, or 27.0% of net sales, from $64.0 million in fiscal 1996, or 25.9% of net
sales. Gross profit of Farah U.S.A. increased 22.8%, to $49.3 million in fiscal
1997, or 23.8% of net sales, from $40.1 million in fiscal 1996, or 22.0% of net
sales. This increase in gross profit at Farah U.S.A. was a result of an increase
in the average selling price per unit, as well as the continued effort to reduce
production costs. Gross profit increases were partially offset by returns and
markdown allowances which resulted from quality problems in selected product
lines.
Gross profit of Farah International increased 2.4% to $16.7 million in
fiscal 1997, or 33.6% of net sales, from $16.3 million in fiscal 1996, or 33.9%
of net sales. The decrease in gross margin was due primarily to increased
production costs, which offset a slight increase in the average price per unit
sold. The weakness of the Australian dollar, relative to the United States
dollar, also contributed to the decrease in gross margin, as a portion of Farah
Australia's raw materials are purchased from the United States.
Gross profit of Savane Direct increased 4.3% to $8.0 million in fiscal
1997, or 47.5% of net sales, from $7.7 million in fiscal 1996, or 45.5% of net
sales. The increase was due to sales of more first quality merchandise as a
percentage of net sales, the closing of stores with low margin contribution and
improvements in inventory management.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 6.8% to $66.4 million in fiscal 1997, or 24.3%
of net sales, from $62.2 million in fiscal 1996, or 25.1% of net sales. The
decrease of selling, general and administrative expenses as a percentage of net
sales was primarily due to sales increases and reduced expenses at Farah U.S.A.,
as well as a reduction in overhead costs at
<PAGE> 27
Savane Direct. The improvement in selling, general and administrative expenses
as a percentage of net sales was partially offset by increased concession,
exhibition and personnel expenses at Farah International.
Termination of Foreign Operations. The loss on the disposal of Farah's
Irish facilities resulted from a fire that occurred at a facility leased by
Farah in Galway, Ireland, in January 1997. The subsequent reevaluation by Farah
of its Irish operations resulted in the decision to terminate manufacturing
activity in Ireland and in the sale of its Irish facility in Kiltimagh. The
pre-tax charge of $5.1 million (net of insurance proceeds) recorded in
connection with the disposal of those facilities consisted primarily of the
write-down of equipment, severance payments, and legal and professional fees.
Production Conversion Expenses. Production conversion expenses aggregated
$2.0 million during fiscal 1997. Farah opened two new laundry facilities and
expanded a finishing facility in Mexico during fiscal 1997. Due to start-up
costs, the facilities incurred higher production costs and produced more
irregular units than expected under normal production conditions.
As a result of the sale of its Piedras Negras facility in fiscal 1996,
Farah relied more heavily on outside contractors as sources of production. The
establishment of new relationships with contractors in fiscal 1997 resulted in
production of irregular units at rates which were higher than expected. The
markdown of these excess irregular units resulted in selling prices which were
below production costs.
Relocation Expenses. In the third quarter of fiscal 1997, Farah completed
its move to new corporate headquarters. In addition, in fiscal 1997 Farah
incurred costs in connection with the relocation of its distribution center.
These relocations resulted in duplicate operating costs, moving expenses and
professional fees of approximately $900,000.
Other Income (Expense). Net interest expense increased 5.0% to
approximately $3.4 million in fiscal 1997 from interest expense of $3.2 million
in fiscal 1996 as a result of a number of significant capital expenditures by
Farah in fiscal 1997, including an expansion of a manufacturing facility, a move
to new corporate headquarters and a transition to a new distribution facility.
Also during fiscal 1997, Farah continued to modify its computer systems with the
goal of enabling those systems to use dates beyond December 31, 1999.
Farah established its Existing Credit Facility during the third quarter of
fiscal 1997. The new agreement reduced the interest rate on Farah's line of
credit. Increases in the prime interest rate earlier in the year, combined with
higher interest rates on the financing of some capital expenditures, offset the
interest rate reduction obtained in Farah's Existing Credit Facility. Interest
income in fiscal 1997 was derived primarily from a note receivable that was
scheduled to mature in 2007. In the fourth quarter of fiscal 1997, the note was
prepaid by the borrower.
Income Tax Expense (Benefit). Farah's effective tax rate was 107.4% in
fiscal 1997 compared with 30.6% in fiscal 1996. Farah recorded a tax benefit of
$3.9 million in fiscal 1997. The recognition of $3.2 million of deferred tax
assets that were generated but not recognized in prior years comprised the
largest portion of Farah's fiscal 1997 tax benefit.
Net Income. As a result of the above factors, net income decreased 96.2%,
to $270,000 in fiscal 1997, or 0.1% of net sales, from $6.8 million in fiscal
1996, or 2.7% of net sales.
FISCAL 1996 COMPARED TO FISCAL 1995
Net Sales. Net sales increased 2.8% to $247.6 million in fiscal 1996 from
$240.8 million in fiscal 1995. Net sales of Farah U.S.A. increased 3.2%, to
$182.8 million in fiscal 1996 from $177.0 million in fiscal 1995. On a
comparative basis from fiscal 1995 to fiscal 1996, sales of Savane(R) products
increased approximately 9.8%, sales of John Henry(R) products decreased by 28.3%
sales of Farah(R) label products decreased 31.8% and sales of private label
product increased 22.7%.
Net sales of Farah International increased 1.1% to $48.0 million in fiscal
1996 from $47.5 million in fiscal 1995. Unit sales and the average unit sales
price both increased by 0.5% in fiscal 1996.
<PAGE> 28
Net sales of Savane Direct increased 3.6% to $16.8 million in fiscal 1996
from $16.2 million in fiscal 1995. Same store sales decreased approximately 3.0%
in fiscal 1996 compared to fiscal 1995. The average unit sales price increased
by 13.4% during fiscal 1996 as the mix of sales of first quality product
improved. Unit sales decreased by 8.7% as competition in the retail outlet
market increased.
Gross Profit. Gross profit increased 16.5% to $64.1 million in fiscal
1996, or 25.9% of net sales, from $55.0 million in fiscal 1995, or 22.8% of net
sales. Gross profit of Farah U.S.A. increased 29.0%, to $40.1 million in fiscal
1996, or 22.0% of net sales, from $31.1 million in fiscal 1995, or 17.6% of net
sales. Gross margin improved at Farah U.S.A. as a result of a cost containment
program initiated in the latter part of fiscal 1995, including increasing
factory efficiencies, reducing overhead and improving first quality production
percentages, factory deliveries and work-in-process turns. There were also
significant reductions in the production work force, particularly in the United
States. Farah also improved product quality and reduced the number of irregulars
and second quality products in fiscal 1996. Finally, Farah recorded fewer
reserves for inventory markdowns in fiscal 1996 resulting from significantly
reduced inventory levels.
Gross profit of Farah International increased 3.8% to $16.3 million in
fiscal 1996, or 33.9% of net sales, from $15.7 million in fiscal 1995, or 33.0%
of net sales. Gross profit of Savane Direct decreased 6.5%, to $7.7 million in
fiscal 1996, or 45.5% of net sales, from $8.2 million in fiscal 1995, or 50.5%
of net sales. Gross margin at Savane Direct was down compared to the prior year,
as a result of higher promotional sales, combined with a lower mix of irregulars
and closeout goods.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased 8.5% to $62.2 million in fiscal 1996, or 25.1%
of net sales, from $68.0 million in fiscal 1995, or 28.2% of net sales. This
decrease was primarily attributable to lower advertising expenses at Farah
U.S.A. as well as reductions in personnel, professional fees and insurance at
Farah U.S.A. and Farah International. These decreases were partially offset by
costs associated with the planned realignment of store operations, including
labor costs and depreciation expense associated with opening new stores in the
United States and increased advertising.
Other Income (Expense). Net interest expense decreased 13.3% to $3.2
million in fiscal 1996, or 1.3% of net sales, from net interest expense of $3.7
million in fiscal 1995, or 1.5% of net sales. Other income in fiscal 1996
included a pre-tax gain of approximately $9.3 million realized on the sale of
Farah's Piedras Negras, Mexico facility.
Income Tax Expense (Benefit). Farah's effective tax rate was 30.6% in
fiscal 1996 compared with 15.3% in fiscal 1995.
Net Income. As a result of the above factors, net income increased to $6.8
million in fiscal 1996, or 2.7% of net sales, from a loss of $12.9 million in
fiscal 1995, or 5.4% of net sales.
LIQUIDITY AND CAPITAL RESOURCES
HISTORICAL LIQUIDITY AND CAPITAL RESOURCES OF TSI
The Company's principal liquidity needs have historically been funding
growth in operations and capital expenditures. The Company has financed its
liquidity needs through cash flow from operations, borrowings under its credit
facilities and the net proceeds from its October 1997 initial public offering.
During fiscal 1997, the Company generated $7.0 million of cash from
operations. This was primarily the result of net income of $8.3 million and a
decrease in inventories of $1.9 million, offset by an increase in accounts
receivable of $5.1 million and a decrease in accounts payable of $1.1 million.
The increase in accounts receivable was primarily the result of a 17.0% increase
in net sales in the fourth quarter of fiscal 1997 as compared to the fourth
quarter of fiscal 1996. The decreases in accounts payable and inventories were
primarily due to a seasonal reduction in production activity. During the
twenty-seven weeks ended April 4, 1998, the Company used $3.3 million of cash in
its operations, primarily due to seasonal increases in accounts receivable and
inventories of $8.4 million and $2.0 million, respectively, offset in part by
net income of $4.6 million and a seasonal increase in accounts payable of $1.3
million.
<PAGE> 29
The Company's Existing Credit Facility consists of a $40.0 million
revolving credit line ($5.5 million of which can be used for letters of credit),
a $3.0 million term note and a $5.0 million equipment loan facility. The amount
available for borrowings under the revolving credit line cannot exceed the
borrowing base, which is defined to include the value of the Company's inventory
and accounts receivable, subject to customary limitations. As of April 4, 1998,
(i) outstanding debt under the revolving credit line was $4.4 million, (ii)
outstanding debt under the equipment loan facility was $2.1 million, and (iii)
the term note had no outstanding balance. In addition, as of April 4, 1998, the
Company had (i) approximately $31.5 million available for additional borrowings
under the revolving credit line, and (ii) approximately $900,000 available for
additional borrowings under the equipment loan facility. No additional
borrowings were available under the term note. As of April 4, 1998, debt
outstanding under TSI's Existing Credit Facility accrued interest at a weighted
average interest rate of approximately 9.0% per annum. Although TSI's Existing
Credit Facility was scheduled to expire by its terms in January 1999, it was
replaced by the New Credit Facility in connection with the consummation of the
Transactions.
Capital expenditures were $5.2 million and $1.8 million for fiscal 1997 and
the twenty-seven weeks ended April 4, 1998, respectively. During fiscal 1996 the
Company spent $6.2 million to acquire the building and land in Tampa, Florida
which houses its distribution and administration functions as well as additional
adjacent property for the purpose of constructing an approximately 110,000
square foot cutting facility. During fiscal 1997, the Company's cutting facility
was completed at a cost of $5.4 million, a portion of which was incurred in
fiscal 1996. The building and land acquisitions and construction of the new
cutting facility were financed primarily through a loan (the "Real Estate Loan")
obtained from SouthTrust Bank of Alabama, National Association ("SouthTrust")
pursuant to the Construction and Term Loan Agreement dated as of May 7, 1996, as
amended (the "Real Estate Loan Agreement"). During fiscal 1997, the Company
converted the Real Estate Loan into a ten-year term loan. As of April 4, 1998,
the outstanding principal amount of the Real Estate Loan was $9.6 million. See
"Description of Other Indebtedness -- Real Estate Loan."
Pursuant to the Factoring Agreement dated October 1, 1995 (the "Factoring
Agreement") between the Company and Heller Financial, Inc. (the "Factor"), the
Company factors substantially all of its accounts receivable. The Factoring
Agreement provides that the Factor will pay the Company an amount equal to the
gross amount of the Company's accounts receivable from customers reduced by
certain offsets, including, among other things, discounts, returns and a
commission payable by the Company to the Factor. The commission equals 0.3% of
the gross amount of the accounts receivable factored. For fiscal 1997 and the
twenty-seven weeks ended April 4, 1998, the Company paid commissions to the
Factor aggregating $504,000 and $384,000, respectively. The Factoring Agreement
expires on September 30, 1998. See "Description of Other
Indebtedness -- Factoring Arrangements."
As of September 27, 1997 and April 4, 1998, the Company had working capital
of $30.2 million and $39.5 million, respectively. The increase in working
capital was due to seasonal and volume related increases in accounts receivable
and inventory, offset in part by a seasonal and volume related increase in
accounts payable. The Company expects its working capital needs will continue to
fluctuate based on seasonal increases in sales and accounts receivable and
seasonal decreases in trade accounts payable.
The Company received $17.3 million in net proceeds from its October 1997
initial public offering. Of the net proceeds, $3.9 million were used to redeem
the Company's preferred stock, $10.6 million were used to reduce amounts
outstanding under the Company's Existing Credit Facility and the remainder was
used for other working capital purposes.
HISTORICAL LIQUIDITY AND CAPITAL RESOURCES OF FARAH
Farah's principal liquidity needs have historically been funding growth in
operations and capital expenditures. Farah has financed its liquidity needs
through cash flow from operations, borrowings under its credit facilities and
borrowings under long-term debt arrangements.
During fiscal 1997, Farah used $17.0 million of cash in its operations.
This primarily resulted from increases in inventories and receivables and a
decrease in trade payables. The growth in inventories resulted from expanding
the number of products Farah offers and increasing shelf stock to meet customer
demand.
<PAGE> 30
During the thirteen weeks ended February 1, 1998, Farah generated $6.1 million
of cash from operations, primarily resulting from a decrease in trade
receivables, offset in part by increased inventory levels and decreased trade
payables. The decrease in trade receivables was consistent with the normal
seasonality of Farah's business. The increase in inventory levels was the result
of sales not meeting expectations and Farah's attempts to build inventory in
order to meet second quarter demand. The decrease in trade payables in fiscal
1997 and the thirteen weeks ended February 1, 1998 resulted mainly from a
decrease in payables for piece goods.
Farah's working capital decreased by $2.5 million to $56.1 million in
fiscal 1997 from $58.6 million in fiscal 1996. Increases in short-term
borrowings and the current portion of long-term debt, partially offset by
increased inventory and decreased accounts payable, were the primary factors
reducing Farah's working capital. Farah's working capital decreased $3.5 million
to $51.3 million in the thirteen weeks ended February 1, 1998 from $54.8 million
in the thirteen weeks ended February 2, 1997. This resulted primarily from
increases in short-term debt and the current portion of long-term debt, offset
in part by increased inventory levels.
Net cash from financing activities was $27.1 million in fiscal 1997.
Short-term borrowings increased by $14.8 million during fiscal 1997, driven
primarily by Farah's use of $11.6 million in cash to purchase property and
equipment, a $12.8 million increase in inventories and a $3.4 million decrease
in accounts payable. The growth in inventories resulted from expanding the
number of products Farah offers and increasing shelf stock to meet customer
demand. Farah used $7.2 million of proceeds from the early retirement of a note
receivable and related certificate of deposit that was previously pledged to
reduce the outstanding revolving loans under its Existing Credit Agreement.
Approximately $5.0 million of the note receivable was previously classified as
non-current. In addition, Farah received a $10.0 million term loan under its
Existing Credit Facility which was also used to reduce the outstanding revolving
loans under its Existing Credit Facility. Net cash used in financing activities
was $3.4 million for the thirteen weeks ended February 1, 1998. This resulted
primarily from decreased revolving borrowings and the repayment of long-term
debt.
During fiscal 1997, Farah established its Existing Credit Facility, which
is comprised of (i) a revolving credit facility which provides availability for
borrowings and letters of credit in an aggregate principal amount of $75.0
million, subject to borrowing base limitations, and (ii) a term loan payable in
monthly installments of $208,333, with the remaining balance due at the end of a
48 month period. As of February 1, 1998, (i) outstanding debt under the
revolving credit facility was $42.3 million and (ii) the outstanding balance of
the term loan was and $8.5 million. In addition, as of February 1, 1998, Farah
had approximately $15.9 million available for additional borrowings under the
revolving credit facility. No additional borrowings were available under the
term loan. As of February 1, 1998, debt outstanding under Farah's Existing
Credit Facility accrued interest at a weighted average interest rate of
approximately 8.7% per annum. Although Farah's Existing Credit Facility was
scheduled to expire by its terms in July 2001, it was replaced by the New Credit
Facility in connection with the consummation of the Transactions.
Capital expenditures for fiscal 1997 were $18.3 million, primarily
consisting of $7.2 million for manufacturing equipment and plant improvements,
$3.9 million for new shelving, equipment and other leasehold improvements at its
new distribution facility and $3.5 million in leasehold improvements and
furnishings for its new corporate headquarters. Capital expenditures for the
thirteen weeks ended February 1, 1998 were approximately $4.8 million, primarily
for additional leasehold improvements at the new distribution facility.
Most of Farah U.S.A.'s major fabric suppliers provide 60-day payment terms,
subject to certain limits. During fiscal 1997 and the thirteen weeks ended
February 1, 1998, Farah's maximum outstanding balance at any month-end under
these payment terms was $9.4 million. Inflation did not materially effect Farah
in fiscal 1997 or the thirteen weeks ended February 1, 1998.
PRO FORMA LIQUIDITY AND CAPITAL RESOURCES
Following consummation of the Transactions, the Company expects that its
principal sources of liquidity will be cash flow from operations and borrowings
under the New Credit Facility, and its principal needs for
<PAGE> 31
liquidity will be to fund working capital and meet debt service requirements.
The Company will incur significant debt in connection with the Transactions. As
of April 4, 1998, on a pro forma basis after giving effect to the Transactions,
the Company's consolidated debt would have been approximately $176.6 million. In
addition, on a pro forma basis after giving effect to the Transactions, the
Company's earnings would have been insufficient to cover fixed charges by
approximately $4.8 million for the twelve months ended April 4, 1998. The
Company's significant debt service obligations following consummation of the
Transactions could, under certain circumstances, have material adverse
consequences to security holders of the Company. See "Risk
Factors -- Substantial Leverage."
In connection with the Farah Acquisition, the Company replaced its $40.0
million Existing Credit Facility and Farah's $75.0 million Existing Credit
Facility with the New Credit Facility, which provides availability for revolving
borrowings and letters of credit in an aggregate principal amount of $85.0
million, subject to borrowing base limitations. The borrowing base is defined to
include the value of the Company's inventory and accounts receivable, subject to
customary limitations. Borrowings under the New Credit Facility may be made by,
or for the account of, the Company and certain of its subsidiaries. Upon
consummation of the Transactions, the Company will have approximately $70.4
million of debt outstanding under the New Credit Facility and, after giving
effect to borrowing base limitations, expects to have $14.6 million (or,
assuming the Company obtains the Credit Facility Increase, $22.6 million) of
additional borrowing availability thereunder. Revolving loans under the New
Credit Facility accrue interest at specified floating rates. The New Credit
Facility has a five year term. See "Description of Other Indebtedness -- New
Credit Facility."
Pursuant to the Factoring Agreement, the Company factors substantially all
of its accounts receivable. The Company intends to establish similar factoring
arrangements for Farah following the consummation of the Transactions. However,
no assurance can be given that the Company will be able to establish such a
factoring arrangement for Farah on favorable terms. See "Description of Other
Indebtedness -- Factoring Arrangements."
Capital expenditures are expected to approximate $7.0 million for the
balance of fiscal 1998. During fiscal 1998, the Company plans to spend up to
$5.0 million (including $845,000 already incurred as of April 4, 1998) to
upgrade or replace certain of its existing computer systems, computer hardware
and software, and for consulting and training related to the new systems. During
fiscal 1999, the Company plans to spend up to $12.0 million for capital
expenditures to upgrade or replace various equipment and systems of the combined
companies. These expenditures will be funded through a combination of cash flow
from operations, borrowings under the New Credit Facility or purchase money
financing. Capital expenditure plans of the Company are frequently reviewed and
are modified from time to time depending on cash availability and other economic
factors.
The ability of the Company to fund working capital needs and meet debt
service requirements will depend on the future operating performance and
financial results of the Company, which will be subject in part to factors
beyond the control of the Company. In addition, the Company's future performance
will depend upon its ability to successfully integrate Farah's operations into
those of the Company in a timely and efficient manner and to achieve estimated
cost savings and business synergies resulting therefrom. Although the Company
believes that cash flow from operations and borrowing availability under the New
Credit Facility will be adequate to fund its short-term and long-term liquidity
needs, there can be no assurance that the Company will generate sufficient cash
flow from operations or that borrowing availability under the New Credit
Facility will be sufficient to fund working capital needs and meet debt service
requirements. See "Risk Factors -- Substantial Leverage."
BACKLOG
As of February 1, 1998 and April 4, 1998, Farah and TSI had unfilled
customer orders of approximately $100.3 million and $88.1 million, respectively.
All such orders are scheduled for shipment within the next 12 months. As of
February 1, 1997 and April 4, 1997, Farah and TSI had unfilled customer orders
of approximately $126.6 million and $85.3 million, respectively. Fulfillment of
orders is affected by a number of factors, including revisions in the scheduling
of manufacture and shipment of the product which, in some
<PAGE> 32
instances, depends on the demands of the retail customer. Accordingly, a
comparison of unfilled orders from period to period is not necessarily
meaningful, and the level of unfilled orders at any given time may not be
indicative of eventual actual shipments. See "Risk Factors -- Reliance on Key
Customers."
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 (SFAS 128), "Earnings Per Share." SFAS
128 superseded ABP Opinion No. 15 "Earnings Per Share." SFAS 128 requires dual
presentation of basic and diluted earnings per share on the face of the income
statement for entities with complex capital structures. SFAS 128 is effective
for annual and interim periods ending after December 15, 1997.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 (SFAS 130), "Reporting Comprehensive
Income." This statement establishes standards for the reporting and display of
comprehensive income and its components. This statement will require additional
disclosures and the Company intends to adopt it in fiscal 1998.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 (SFAS 131), "Disclosures about Segments
of an Enterprise and Related Information." This Statement requires that public
business enterprises report certain information about operating segments in
complete sets of financial statements of the enterprise and in condensed
financial statements of interim periods issued to shareholders. It also requires
that public business enterprises report certain information about their product
and services, the geographic areas in which they operate, and their major
customers. Upon adoption of this pronouncement, additional disclosures will be
required by the Company. This statement is effective for fiscal years beginning
after December 15, 1997. Earlier application is encouraged. The Company intends
to adopt this statement for fiscal 1998.
In February 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 132 (SFAS 132), "Employers Disclosure
About Pension and Other Postretirement Benefits." SFAS 132 revises employers
disclosures about pensions and other post-retirement benefit plans. This
statement is effective for fiscal years beginning after December 15, 1997,
although earlier application is encouraged. The Company intends to adopt this
statement in fiscal 1998.
IMPACT OF THE YEAR 2000 ISSUE
The "Year 2000 Issue" is the result of computer programs and systems having
been designed and developed to use two digits, rather than four, to define the
applicable year. As a result, these computer programs and systems may recognize
a date using "00" as the year 1900 rather than the year 2000. This could result
in a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices or engage in similar normal business activities.
The new or upgraded management information systems which TSI began
implementing in the second quarter of fiscal 1998 will, among other things,
address problems resulting from the Year 2000 Issue. The Year 2000 Issue impacts
TSI's main operating system which includes subsystems related to customer
analysis, order processing, planning, procurement, production and sales. While
the new management information system, which is Year 2000 compliant, will not be
operational until approximately the third quarter of fiscal 1999, TSI plans to
have all existing systems Year 2000 compliant by the first quarter of fiscal
1999 and plans to spend up to $500,000 for this portion of its systems upgrade.
Based on assessments made during fiscal 1996 and 1997, Farah decided to
replace its entire inventory management, warehouse distribution and order
processing systems so that those systems will be Year 2000 compliant. Farah will
utilize both internal and external resources to reprogram or replace and test
the software for Year 2000 modifications. The Company plans to complete the
inventory management and order processing portions of Farah's Year 2000 project
no later than December 31, 1998 and plans to complete the remainder of the
project by June 30, 1999. Farah incurred $1.0 million in costs attributable to
Year 2000 compliance in
<PAGE> 33
fiscal 1997 and expects to incur an additional $2.6 million in fiscal 1998. The
majority of these costs have been and will continue to be capitalized, as they
relate to software purchases and development.
The Company and Farah are currently communicating with all significant
suppliers and large customers to determine the extent to which the Company and
Farah are vulnerable to those third parties' failure to remediate their own Year
2000 Issues. The Company believes that the modifications and conversions that it
and Farah are making and plan to make will allow it to mitigate problems
resulting from the Year 2000 Issue. However, if such modifications and
conversions are not made or are not completed timely, the Year 2000 Issue could
have a material adverse effect on the Company's business, results of operations
and financial condition.
<PAGE> 34
BUSINESS
GENERAL
TSI
TSI produces and markets high quality casual pants, jeans, shorts and dress
pants principally for men, which are marketed under TSI brands, private brands
and licensed brand names. In addition, in fiscal 1998 TSI introduced lines of
women's sportswear and men's and women's shirts marketed under its brands and
private brands. TSI's major brands include private brands such as Flyers(TM),
TSI brands such as Bay to Bay(R), Banana Joe(TM), Two Pepper(R) and Texas
Jeans(TM) and licensed brands such as Bill Blass(R) and Van Heusen(R). TSI
markets its apparel to leading apparel retailers in most major retail
distribution channels, including department and specialty stores, catalog
retailers, discount merchants and wholesale clubs. Key customers include Costco
Companies, Inc. ("Costco"), Dayton Hudson Corporation ("Dayton Hudson"),
Dillard's Department Stores, Inc. ("Dillard's"), Eddie Bauer Int'l ("Eddie
Bauer"), Federated Department Stores, Inc. (including Bloomingdale's and Macy's)
("Federated Department Stores"), J.C. Penney Company, Inc. ("J.C. Penney"), May
Department Stores Company ("May Co."), Nordstrom, Inc. ("Nordstrom"),
Phillips-Van Heusen Corporation ("Phillips-Van Heusen"), Sam's Club (a division
of Wal-Mart Stores, Inc. ("Wal-Mart")) ("Sams Club") and Sears, Roebuck and Co.
("Sears").
FARAH
Farah is a leading manufacturer and marketer of high quality casual and
dress pants, shorts, sportcoats, suit separates (matching pants and sportcoats),
skirts and shirts principally marketed under the well-known Savane(R), Farah(R)
and John Henry(R) brands. Farah operates three divisions: Farah U.S.A., Farah
International and Savane Direct. Farah U.S.A., which accounted for approximately
75.7% of Farah's fiscal 1997 net sales, produces branded and private label
casual and dress apparel marketed to retailers throughout the United States.
Farah International, which accounted for approximately 18.1% of Farah's fiscal
1997 net sales, manufactures, sources and markets apparel primarily in the
United Kingdom, Australia and New Zealand. Savane Direct, which accounted for
approximately 6.2% of Farah's fiscal 1997 net sales, operates 34 United States
retail stores that sell first quality, close-out and second quality Farah
apparel and a limited amount of merchandise purchased from third parties. Key
customers include Belks Stores Services, Incorporated ("Belks"), Dillard's,
Federated Department Stores, Frederick Atkins Incorporated ("Frederick Atkins"),
May Co., Proffitt's, Inc. ("Proffitt's"), Sears and Wal-Mart.
INDUSTRY
The United States apparel industry (including soft-line home furnishings)
totaled approximately $181.0 billion in retail sales in 1997. Of this amount,
the men's apparel business represented 28.1%, while the women's apparel business
represented 49.4%. In 1996 and 1997, the apparel industry grew approximately
5.8% and 3.5%, respectively. Over the same period, the men's bottoms (i.e.,
pants and shorts) business, representing approximately 7.4% of the total apparel
market, grew approximately 10.5% and 3.4%, respectively, and the women's bottoms
(i.e., pants and shorts) business, representing 8.1% of the total apparel
market, grew approximately 5.0% and 8.0%, respectively. TSI believes that the
apparel industry is characterized by the following trends:
Trend Toward Retail Merchandise Management Programs. The Company
believes that major apparel retailers are increasingly outsourcing
apparel merchandise management programs to minimize inventory risks and
increase profitability. In addition, the Company believes that major
apparel retailers are consolidating their suppliers to increase
profitability by improving customer service and enhancing economies of
scale. The Company believes that its ability to offer leading brands,
including those acquired in the Farah Acquisition, combined with TSI's
private brand programs, position it well to capitalize on these trends.
Retail Consolidation of Branded Merchandise. The Company believes that
major apparel retailers are reducing the number of brands they offer in
favor of a few of the most well-recognized consumer
<PAGE> 35
brands. Department, chain and discount store retailers have allocated
increasing retail space to "in-store" apparel shops featuring individual
brands merchandised with custom fixturing supplied by the branded
producers. The Company believes that Farah's Savane(R), Farah(R) and
licensed John Henry(R) brands are favored by their respective customers
and are well-positioned to gain market share by investing in enhanced
point-of-sale merchandising.
Trend Toward High Quality Private Brand Apparel. The Company believes
that there is a trend toward using high quality, private brand apparel
to complement branded programs. Private brand apparel bears the
retailer's own name or a proprietary brand name exclusive to the
retailer. Producers are able to sell these garments at lower wholesale
prices due to certain economies, including lower advertising and
promotional costs, lack of brand name license fees and royalties, and
reduced markdown and other risks and expenses inherent in the brand-name
apparel industry. As a result of the lower wholesale prices, private
brand apparel generally provides higher margins for the retailer than
brand name products. TSI believes that this shift is due primarily to
the education of consumers and retailers as to the quality and value of
private brand products. TSI believes consumers increasingly regard
private brand products as less expensive than brand name products, but
of equal or better quality. This increase in consumer demand for private
brand garments, coupled with retailers' demands for higher margins, has
resulted in retailers allocating more space to private brand products.
Trend Toward Casual Dress. TSI believes that there is a growing trend
in the United States toward casual dress, as reflected in the
implementation of policies such as "casual Fridays." In addition, TSI
believes that the number of people who work at home is increasing
substantially and that outside of the workplace, people's social
activities are focusing on a more casual lifestyle.
Expansion of Caribbean, Mexican and Latin American Production. Until
recently, most apparel was produced domestically or in Pacific Rim
countries. Since the passage of Section 807 of the Harmonized Tariff
Schedule ("HTS") of the United States (now found under tariff subheading
9802.00.80, but herein referred to as "Section 807"), United States
apparel companies have increasingly used production facilities located
in the Caribbean Basin, including the Dominican Republic. TSI believes
that the Dominican Republic offers certain competitive advantages,
including favorable pricing and better quality production, a
long-standing and relatively stable production network, and shorter
transportation periods as compared to goods assembled in the Pacific
Rim. Under Section 807, customs duties on apparel products assembled in
the Caribbean Basin may be offset by the costs incurred in the
production of components in the United States (plus freight and
insurance). More recently, the North American Free Trade Agreement
("NAFTA"), effective in 1994, has permitted Mexican manufacturers to
ship finished apparel products into the United States duty-free or at
reduced duties. 1996 marked the first year in which apparel products
exported to the United States from Mexico exceeded products exported
from any other country, including China.
EXPECTED BENEFITS OF THE FARAH ACQUISITION
The Company believes that the combination of TSI and Farah will position it
to offer major retailers complete private label and branded merchandise
management programs in core apparel lines featuring both Farah's well-known
brands and TSI's brands and private brand programs. The Company intends to apply
TSI's proven production technology, comprehensive planning, control and customer
service systems and innovative operating policies and procedures to integrate
and substantially improve the profitability of Farah's operations. Anticipated
benefits of the Farah Acquisition include the following:
Complementary Branded and Private Label Product Line. TSI believes the
Savane(R), Farah(R) and John Henry(R) brands complement TSI's brands and
private brands, positioning the Company to offer differentiated branded
and private label program in core apparel lines. The Company believes
that it can leverage its strength in these categories to develop
customized merchandise management programs featuring branded and private
brand men's shirts, women's basic sportswear and products in other core
apparel categories.
<PAGE> 36
Expanded Customer Base and Increased Customer Penetration. The Company
believes that its customized merchandise management programs and
customer service capabilities, together with the strength of the Farah
brands, will enable the Company to increase sales to existing accounts
and establish new accounts. The Company believes that substantial cross
selling opportunities exist to market TSI brand products to Farah's
customers and Farah brand products to TSI's customers. The Company
intends to market merchandise management programs to increase sales to
these existing customers, as well as generate sales to new customers.
Greater Critical Mass. The Farah Acquisition will significantly
increase the Company's revenue base. On a pro forma basis after giving
effect to the Transactions, the Company's net sales for the twelve
months ended April 4, 1998 would have been approximately $433.6 million.
The Company believes that its increased size, marketing resources,
production capacity and product offerings will enhance its relationships
with key suppliers and retailers and strengthen its competitive position
in the apparel industry.
Cost Savings. As part of its integration plan for the Farah
Acquisition, the Company believes that it can achieve at least $23.2
million of annual cost savings by the end of fiscal 1999. These cost
savings include (i) a reduction of selling, general and administrative
expenses (including distribution expenses) resulting in approximately
$2.5 million of annual cost savings, (ii) the realization of production
efficiencies resulting in approximately $15.2 million of annual cost
savings and (iii) improvements in inventory management resulting in
approximately $5.5 million of annual cost savings.
Potential Divestiture Opportunities. Following the Farah Acquisition,
the Company intends to evaluate Farah's assets in light of TSI's
strategic and financial objectives and, to the extent such assets do not
fit within those objectives, dispose of or discontinue operating such
assets. The Company is currently considering its alternatives with
respect to the Farah International and Savane Direct businesses. In
addition, the Company intends to close the remainder of Farah's sewing
operations in San Jose, Costa Rica. There can be no assurance that any
disposition or closure will be consummated.
BUSINESS AND GROWTH STRATEGY
The Company believes that the Farah Acquisition will position it to take
advantage of key industry trends including: (i) an increasing emphasis by major
apparel retailers on outsourced merchandise management programs for core apparel
lines; (ii) a reduction by major retailers in the number of brands offered in
favor of a few of the most well-recognized consumer brands; (iii) an increase in
retailer and consumer demand for high-quality private brand apparel; (iv) a
shift in consumer preference toward casual dress; and (v) a shift in trade
policy which favors the manufacture of products in Mexico, the Caribbean and
Latin America. The key elements of the Company's business and growth strategies
include:
Advanced Planning and Control Systems and Procedures. The Company
employs advanced technology and comprehensive operating systems and
procedures which integrate and monitor each operation to reduce
inefficiencies, increase productivity and enhance customer service.
High-Quality Products. The Company applies stringent quality standards
throughout its operations, from the design of its products through the
shipment of customer orders. In fiscal 1997, the application of these
standards resulted in a rate of production of second quality finished
goods of 1.1% of total production.
Low-Cost and Flexible Operations. The Company is organized to effect a
short production cycle from the receipt of raw materials through the
shipment of a customer order. TSI believes its "chassis" production
concept allows it to execute more cost-effective production runs than
those of its competitors. The Company outsources labor intensive garment
assembly and finishing operations to independent manufacturers on a
fixed cost per unit basis. This strategy reduces the personnel and
capital resources invested in the production process and enables TSI to
vary production levels with changes in customer demand.
<PAGE> 37
Minimized Inventory Risk. The Company believes that it minimizes its
inventory risks by (i) producing focused lines of core apparel products,
(ii) minimizing the production cycle and maximizing production
flexibility and (iii) tracking customer demand trends by SKU on a per
store basis. In fiscal 1997, TSI's production cycle averaged 38 days and
average inventory turnover was approximately five times.
Customer Service. The Company provides customer satisfaction through
high-quality products and customized merchandise management programs.
These programs serve to increase retailer margins by outsourcing
traditional retailer merchandising functions and reducing inventory risk
and excessive markdowns.
Expand Private Brand Programs for Major Retailers. The Company believes
its high-quality and low-cost products, strong customer service and
merchandise management capabilities position it to increase private
brand market share as retailers consolidate and outsource private brand
programs.
New Product Introductions. The Company intends to develop and market
products that complement existing core product lines. Targeted product
categories include lines of men's casual shirts and women's sportswear.
All new product lines will employ the Company's "chassis" production
concept.
Acquisitions. The Company will consider the acquisition of additional
established brands as well as the acquisition of producers of
complementary new product lines. The Company regularly evaluates
acquisition opportunities, but currently has no agreements, arrangements
or understandings with respect to any acquisitions, other than the Farah
Acquisition, and there can be no assurance that any acquisitions will be
consummated. See "Risk Factors -- Acquisitions."
INTEGRATION PLAN
TSI and Farah produce similar products and use similar production
operations. Because Farah principally markets branded products, the Company
expects that it will realize higher average unit selling prices and higher gross
margins on sales of Farah products than sales of products generated by TSI's
private label programs. Because of the similarity of TSI's and Farah's product
lines, the Company believes that operations and unit production costs will
generally be comparable for TSI's and Farah's products.
Following the Farah Acquisition, TSI intends to implement a comprehensive
plan to integrate Farah's products and operations into its existing systems. As
part of this integration strategy, TSI intends to take the following actions:
Rationalize Farah Product Offerings. TSI intends to reduce the number
of styles and SKU's of Farah branded products to concentrate on only
those products which TSI believes generate appropriate levels of sales
and profitability. TSI believes that this reduction of Farah's product
line will reduce inventory levels and costly markdown and close-out
sales and improve customer service. The Company also intends to
integrate Farah's private label programs with those of TSI. In addition,
the Company intends to develop new products to merchandise under the
Farah brands, which will conform to TSI's "chassis" production concept.
Develop Independent Brand Strategies. TSI intends to manage the TSI
brands and each of the Farah owned Savane(R) and Farah(R) brands and the
licensed John Henry(R) brand as separate businesses with distinct brand
management programs. The Savane(R) brand will continue to be marketed to
the department store channel with key targeted customers including
Federated Department Stores, May Co., Dillard's and Proffitt's. The John
Henry(R) brand will continue to be marketed exclusively through Sears,
and Farah(R) brand pants, shorts and jeans will continue to be marketed
through the mass merchant channel. TSI intends to invest in cooperative
advertising and merchandising programs with certain key customers to
enhance demand for the Farah brands. The Company plans to apply TSI's
proven merchandise management and customer service capabilities to
improve Farah's partnerships with its key accounts.
<PAGE> 38
Focus on Market Analysis and Sales Forecasting. Farah has historically
forecasted sales based on customer-specific and market data on a monthly
basis. TSI generally forecasts sales once per week. TSI intends to
initiate semi-weekly sales forecasting for the Farah businesses and
integrate the resulting sales forecasts with TSI's purchasing and
production planning and control systems. TSI believes that the
application of TSI's sales forecasting systems and procedures to Farah's
businesses will reduce the amount of excess, slow moving and obsolete
Farah inventory.
Joint Sales and Marketing. The Company intends to consolidate TSI's and
Farah's sales management and market Farah's branded products to TSI's
customers and TSI's private brand programs to Farah's customers. TSI's
sales mix is concentrated in the wholesale clubs and mass merchant
channels with modest penetration of chain stores and department stores.
Farah's sales mix is strongest with department stores through its
Savane(R) line of products. The Company believes that it can increase
net sales through focused joint sales and marketing programs targeting
the entire TSI and Farah customer base.
Rationalize Production. The Company intends to apply TSI's
sophisticated production planning and control systems and procedures,
integrated with its sales forecasting system, to manage Farah's
production. TSI intends to integrate and consolidate Farah's cutting,
assembly and finishing operations to realize economies of scale, balance
production operations and reduce unit production costs. The Company also
intends to convert Farah's assembly and finishing operations to modular
work teams to reduce work in process inventories and increase
productivity. The Company also intends to apply TSI's production
planning and control systems to reduce shipping costs and improve
customer order execution.
Consolidate Purchasing. The Company intends to combine TSI's and
Farah's raw materials purchasing to realize economies of scale, improve
raw materials quality and reduce raw materials inventories. The Company
expects to consolidate raw materials suppliers, institute its
just-in-time inventory management programs with its leading suppliers
and inspect raw materials at supplier mills before receipt.
Distribution. Farah recently opened its new distribution facility and
has experienced difficulties in processing orders which has led to
substantial customer order cancellations. The Company intends to apply
its comprehensive operating systems and procedures to Farah's
distribution system. The Company believes these changes will be
implemented by the end of fiscal 1999.
Reduce General and Administrative Expenses. TSI intends to consolidate
Farah into TSI's general and administrative infrastructure, which TSI
believes will result in cost savings by eliminating redundancies and
nonrecurring activities associated with Farah's public company reporting
and administrative costs, insurance coverages and professional fees.
Farah's financial reporting and internal control procedures will be
integrated with TSI's systems. TSI's chief financial officer and
controller will assume supervisory responsibility for Farah's
accounting, financial reporting and internal controls.
Integrate MIS Functions. TSI intends to operate Farah's information
systems in parallel with TSI's, evaluate the best practices of both
systems and integrate systems functions as appropriate on an
application-by-application basis. The separate information systems
staffs will be supervised by TSI's chief information officer.
Potential Divestiture Opportunities. Following the Farah Acquisition,
the Company intends to evaluate Farah's assets in light of TSI's
strategic and financial objectives and, to the extent such assets do not
fit within those objectives, dispose of or discontinue operating such
assets. The Company is currently considering its alternatives with
respect to Farah International and Savane Direct businesses. During the
first quarter of fiscal 1998, Farah decided to close its finishing
facility in Cartago, Costa Rica and reduce its sewing operations in San
Jose, Costa Rica. The Company intends to close the remainder of Farah's
sewing operations in San Jose, Costa Rica. There can be no assurance
that any such disposition or closure will be consummated.
<PAGE> 39
Farah International sells apparel primarily in the United Kingdom,
Australia and New Zealand, under the Savane(R) and Farah(R) labels.
Farah International's product lines include principally dress and casual
slacks, and shirts and sweaters manufactured by third parties and made
from polyester fabrics or polyester blended fabrics. The United Kingdom
is Farah International's principal market and in fiscal 1997 accounted
for approximately 63.0% of its sales. Farah Australia and Farah New
Zealand accounted for approximately 36.0% of Farah International's sales
in fiscal 1997. Farah sells most of its products in the Australian and
New Zealand markets under the Savane(R) and Farah(R) labels. In fiscal
1997, net sales and EBITDA attributable to Farah International were
$49.7 million and $1.9 million, respectively. Farah's retail store
division, Savane Direct, currently operates 34 stores in the United
States, most of which are located in outlet malls. In fiscal 1997, net
sales and EBITDA attributable to Savane Direct were $16.8 million and
$86,000, respectively.
PRODUCTS
TSI
TSI produces and markets high quality casual pants, jeans, shorts and dress
pants principally for men, which are marketed under TSI brands, private brands
and licensed brand names. Most of TSI's apparel line focuses on basic, recurring
styles that TSI believes are less susceptible to fashion obsolescence and less
seasonal in nature than fashion styles. Key fabrics include 100% cotton and
synthetic blends using rayon, wool and polyester. Key fabric constructions
include twill, denim, corduroy and wrinkle-free fabrications. The table below
sets forth sales mix, expressed as a percentage of net sales, and retail price
points per product category:
<TABLE>
<CAPTION>
TWENTY-SIX TWENTY-SEVEN
FISCAL YEAR WEEKS ENDED WEEKS ENDED
--------------------- MARCH 29, APRIL 4, CURRENT RETAIL
1995 1996 1997 1997 1998 PRICE RANGE
----- ----- ----- ----------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
Casual pants............ 48.5% 56.8% 53.9% 53.5% 52.6% $17.99 - $39.99
Shorts (including
denim)................ 42.8 34.4 32.1 35.5 37.2 11.99 - 24.99
Dress pants............. 0.9 1.7 8.6 5.5 5.1 24.99 - 39.99
Denim jeans............. 7.8 7.1 5.4 5.5 5.1 16.99 - 24.99
----- ----- ----- ----- -----
100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
</TABLE>
TSI's design staff examines domestic and international trends in the
apparel industry as well as industries completely outside the sphere of clothing
manufacture, including the automobile, grocery and home furnishings industries,
to determine trends in consumer preferences for styling, color, labeling and
packaging, quality and general lifestyle. Virtually all of TSI's products are
designed by its in-house staff using CAD technology, which enables TSI to
produce computer simulated samples that display how a particular style will look
in a given color and fabric. The use of CAD technology reduces the time and
costs associated with producing actual sewn samples prior to customer approval
and allows TSI to create custom designed products meeting the specific needs of
a customer. Product design and development is integrated with production
planning and control operations to ensure that individual garment construction
specifications are consistent with TSI's "chassis" production strategy and its
product quality and production efficiency standards.
FARAH
Farah U.S.A. manufactures and markets high quality, medium priced, branded
and private label apparel for men, boys and women. Products include casual and
dress pants, sportcoats, suit separates, skirts and shirts
<PAGE> 40
consisting of 100% cotton and blended fabrics that emphasize comfort, fit and
performance. The table below sets forth sales mix, expressed as a percentage of
net sales, and retail price points per product category:
<TABLE>
<CAPTION>
FISCAL YEAR THIRTEEN WEEKS ENDED
--------------------- -------------------------
FEBRUARY 2, FEBRUARY 1, CURRENT RETAIL
1995 1996 1997 1997 1998 PRICE RANGE
----- ----- ----- ----------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Casual pants.............. 72.1% 70.5% 68.3% 76.4% 66.2% $ 17.96 -$ 55.00
Dress pants............... 17.7 19.1 20.0 18.5 21.3 19.96 - 60.00
Suit coats/sportcoats..... 6.3 5.2 3.6 3.3 4.3 125.00 - 150.00
Shirts.................... -- 0.8 3.6 1.5 4.0 30.00 - 48.00
Shorts.................... 3.8 3.2 3.5 0.1 3.1 19.99 - 35.00
Denim jeans............... 0.1 1.2 0.6 0.2 0.6 17.99 - 24.99
Skirts.................... -- -- 0.4 -- 0.5 30.00 - 32.00
----- ----- ----- ----- -----
100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
</TABLE>
Farah U.S.A.'s products are sold under three primary labels: Savane(R),
Farah(R) and John Henry(R). Farah owns the Savane(R) and Farah(R) labels and
licenses the John Henry(R) label.
Farah has positioned products marketed under the Savane(R) label as high
quality garments using better fabrics and finer workmanship. Savane(R) casuals
include pants and shorts for men and boys and pants, shorts, shirts and skirts
for women made primarily from 100% cotton fabrics. Savane(R) dress wear includes
men's pants, sportcoats and suit separates made primarily of polyester/wool and
polyester/wool/lycra blend fabrics. Products sold under its Farah(R) label
include men's casual and dress pants. Dress pants are made from blended fabrics,
while casual pants are mainly 100% cotton. The John Henry(R) label is primarily
used for dress pants, suit separates and sportcoats produced from blended
fabrics.
CUSTOMERS AND CUSTOMER SERVICE
TSI
TSI markets its products to approximately 75 department and specialty
stores, catalog retailers, discount merchants and wholesale clubs. TSI's
products are sold at over 6,000 outlets throughout the United States, Canada,
Mexico and Central America. Sales to TSI's five largest customers represented
69.8% and 63.9% of net sales during fiscal 1997 and the twenty-seven weeks ended
April 4, 1998, respectively. Sales to Wal-Mart (substantially all of which
represent sales to Sam's Club), Costco and Phillips-Van Heusen accounted for
approximately 28.7%, 17.0%, and 11.0% respectively, of net sales for fiscal 1997
and approximately 24.6%, 15.4% and 8.1%, respectively, of net sales for the
twenty-seven weeks ended April 4, 1998. TSI also sells its products to other
major retailers, including Dayton Hudson, Federated Department Stores, J.C.
Penney, May Co. and Nordstrom, none of which accounted for more than 10.0% of
the Company's net sales in fiscal 1997 or the twenty-seven weeks ended April 4,
1998. TSI believes that its innovative business strategies, customer service
capabilities and focus on aggressive inventory management have resulted in large
part from servicing the quick response merchandise management demands of Sam's
Club and Costco. See "Risk Factors -- Reliance on Key Customers."
<PAGE> 41
Set forth below are comparative sales mix data, expressed as a percentage
of net sales, by marketing channel:
<TABLE>
<CAPTION>
TWENTY-SIX TWENTY-SEVEN
FISCAL YEAR WEEKS ENDED WEEKS ENDED
--------------------- MARCH 29, APRIL 4,
CHANNEL 1995 1996 1997 1997 1998
- ------- ----- ----- ----- ----------- ------------
<S> <C> <C> <C> <C> <C>
Wholesale club......................... 29.8% 42.3% 46.1% 48.1% 41.5%
Discount and mass merchant............. 31.3 21.4 21.1 17.9 21.2
National chain......................... 20.9 14.5 12.3 15.7 17.8
Department store....................... 8.8 14.4 10.9 11.3 11.4
Specialty store........................ 4.9 4.7 5.4 5.0 5.6
Catalog................................ 2.5 1.1 0.2 0.3 0.4
Other.................................. 1.8 1.6 4.0 1.7 2.1
----- ----- ----- ----- -----
100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
</TABLE>
TSI offers its customers comprehensive merchandise management programs,
which include: (i) product development and design; (ii) customized planning of
store-level merchandise assortments and inventories by SKU; (iii) consistently
high quality and high value products; (iv) custom labeling and packaging design;
(v) quick response electronic order execution and automatic store-level
merchandise replenishment programs; (vi) real time analysis of store-level sales
by SKU to predict consumer demand trends; (vii) retail profitability analysis by
style and overall assortment; and (viii) access to sophisticated sales
forecasting and inventory management systems. The Company intends to continue to
promote these capabilities aggressively to increase sales.
FARAH
Farah U.S.A. markets its brands in three distinct markets. Savane(R)
products are sold to major department stores, John Henry(R) products are sold
exclusively to Sears and Farah(R) products are sold to mass-merchants,
principally Wal-Mart. During fiscal 1997, Farah's ten largest customers
accounted for approximately 66.0% of Farah's net sales. Sales to Federated
Department Stores, Dillard's and Wal-Mart accounted for approximately 13.1%,
12.8% and 10.0% respectively, of net sales for fiscal 1997 and approximately
12.8%, 10.5% and 17.4% of net sales for the thirteen weeks ended February 1,
1998. See "Risk Factors -- Reliance on Key Customers."
Set forth below are comparative sales mix data, expressed as a percentage
of net sales, by marketing channel:
<TABLE>
<CAPTION>
FISCAL YEAR THIRTEEN WEEKS ENDED
----------------------- -------------------------
FEBRUARY 2, FEBRUARY 1,
CHANNEL 1995 1996 1997 1997 1998
- ------- ----- ----- ----- ----------- -----------
<S> <C> <C> <C> <C> <C>
Department store......................... 64.5% 62.7% 63.1% 61.9% 59.7%
Discount and mass merchant............... 10.7 15.6 20.7 25.0 18.2
Wholesale club........................... -- -- 1.1 -- 9.1
National chain........................... 7.6 7.5 7.2 4.5 7.5
Specialty store.......................... 13.4 11.4 6.0 6.7 5.1
Other.................................... 3.8 2.8 1.9 1.9 0.4
----- ----- ----- ----- -----
100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
</TABLE>
MARKETING AND SALES
TSI
TSI employs sales representatives located in eight states having an average
of over 16 years of experience in the apparel industry. TSI also maintains a
sales and marketing support staff in Tampa dedicated to analyzing sales and
marketing data. Using its market data and industry experience, TSI offers each
of its
<PAGE> 42
existing and prospective customers a marketing plan tailored to the customer's
market niche, which details by SKU optimal product assortments and inventory
levels, retail sales performance and trends, pricing strategies and profit
margins. TSI operates a sophisticated electronic data interchange ("EDI") system
to execute customer orders on a quick response basis. In fiscal 1997, TSI
processed substantially all of its customer orders via its EDI system and
typically shipped customer orders within 72 hours of receiving the purchase
order.
FARAH
Farah U.S.A.'s sales force consists of regional corporate account
executives who are directly responsible for certain major retail accounts,
including Federated Department Stores, May Co., Dillard's, Sears and Wal-Mart,
and regional sales representatives who report to the corporate account
executives and assist them with the major retail accounts. The regional sales
representatives are also responsible for sales to smaller retailers. Farah
U.S.A. employs merchandise coordinators who visit retail stores that carry
Farah's branded products to train store personnel to sell Farah products, ensure
proper point-of-sale merchandising and presentation of the Farah products, and
enhance customer satisfaction with the Farah brands. Farah U.S.A.'s marketing
and advertising program consists of point-of-sale merchandising fixtures and
materials, national print advertising and participation in cooperative
advertising programs with retailers.
Farah U.S.A. fills retailers' orders from inventory at its distribution
center and ships orders directly to retailers' stores or their distribution
centers. During the thirteen weeks ended February 1, 1998, Farah opened its new
distribution center in Santa Teresa, New Mexico. Farah has implemented an EDI
system with selected large retailers and, in fiscal 1997, substantially all of
its customer orders were processed through its EDI system.
PRODUCTION
TSI
Overview. TSI inventories, spreads, marks and cuts virtually all of the
fabric used in the manufacture of its products at its owned facility in Tampa,
Florida. The components are then assembled by independent manufacturers outside
the United States, principally in the Dominican Republic, and shipped back to
TSI's Tampa facilities for labeling, packaging and distribution. TSI also
imports finished goods, principally denim jeans, shorts and shirts from Mexico,
the Pacific Rim and the Middle East. TSI believes that the use of independent
garment assembly and finishing contractors enables it to provide customers with
high quality goods at significantly lower prices than if it operated its own
assembly facilities. In fiscal 1997, products originating from TSI's Tampa
cutting facility and imported finished goods represented approximately 83.4% and
16.6%, respectively, of the products sourced by TSI. In fiscal 1997, the
production cycle from receipt of raw materials through the availability for
shipping of finished goods averaged 38 days compared to 43 days in fiscal 1996
and 52 days in fiscal 1995. In fiscal 1997, TSI's average finished goods
inventories, expressed as days of net sales, were 45 days, compared to 57 days
in fiscal 1996 and 50 days in fiscal 1995. TSI believes that it is organized to
maximize manufacturing productivity and minimize inventory risk. See "Risk
Factors -- International Sourcing and Manufacturing."
Production Planning and Control. TSI applies stringent production planning
and control systems and procedures throughout the production process to increase
productivity, reduce unit production costs and mitigate inventory risk. Detailed
production plans by SKU are developed based on individual long-range customer
merchandise plans and are reset twice per week based on TSI's retail sales
demand forecasting and market trend analysis. The production plan governs each
stage of garment fabrication to enhance high-quality and low-cost production. In
fiscal 1997, TSI's average work-in-process inventories, expressed as days of net
sales, were 18 days, compared to 25 days in fiscal 1996 and 35 days in fiscal
1995.
Raw Materials Sourcing. Based on its production plan, TSI purchases raw
materials, including fabrics, thread, trim and labeling and packaging materials,
on virtually a just-in-time basis from domestic sources based on quality,
pricing and availability. TSI's personnel inspect raw materials quality at
suppliers' facilities to avoid the handling costs and production plan disruption
of receiving off-quality materials. TSI has no long-term contracts with any of
its suppliers and maintains multiple sources of supply for key raw materials,
which
<PAGE> 43
include generally available fabric constructions and trim components. In fiscal
1997 and 1996, TSI's average raw materials inventories, expressed as days of net
sales, were 10 days in each fiscal year, compared to 7 days in fiscal 1995. See
"Risk Factors -- Price and Availability of Raw Materials."
Cutting. Since 1989, TSI has invested in computerized equipment for
spreading, marking and cutting fabric to ensure color consistency and maximize
fabric utilization. In fiscal 1997, TSI's fabric utilization averaged
approximately 92.0% compared with an industry average of approximately 87.0%.
TSI has also invested in state-of-the-art fabric handling and cutting
technology, including 12 air table handling systems, 11 Niebuhr spreaders, and
three Gerber computerized cutting systems. TSI has organized its cutting
facility with utilities and infrastructure located outside the cutting room to
permit conversion of the facility to a distribution center as off-shore cutting
capabilities develop.
Assembly and Finishing. Cut fabric and components (buttons, zippers, etc.)
are shipped by common carrier to independent manufacturers, principally in the
Dominican Republic, for garment assembly and finishing. TSI currently uses
approximately 15 manufacturers in the Dominican Republic that specialize in
assembling and finishing products on one or more "chassis" and adhere to TSI's
specific operating procedures. TSI has converted all of its contractors to
modular work teams from the traditional assembly line production, which TSI
believes has improved productivity. In addition, TSI's production planning and
control system tracks production at each assembly and finishing stage to
identify production difficulties as they occur and thereby increase efficiency
and minimize costly rework and off-quality finished goods. TSI's team of 14
quality control personnel inspects production by the independent manufacturers
on a daily basis to ensure strict adherence to operating procedures and quality
standards. TSI has used these manufacturers for an average of more than three
years and enjoys, in effect, exclusive relations with 10 of them.
TSI believes that manufacturing in the Dominican Republic offers TSI
certain competitive advantages, including favorable pricing and better quality
production, a long-standing and relatively stable production network, and much
shorter transportation periods than goods assembled in the Pacific Rim. In
addition, United States customs duties programs, such as Section 807, facilitate
assembly in the Caribbean Basin by completely eliminating or substantially
reducing the customs duties on the import of assembled United States components.
TSI arranges for assembly and finishing on a per unit basis and does not have
any long-term contracts with any of its independent contractors. TSI is able to
shift its sources of supply depending upon production and delivery requirements
and cost, while at the same time reducing the need for significant capital
expenditures, work-in-process inventory and a large production work force. TSI
believes that its relations with its contractors are generally good.
Labeling, Packaging and Shipping. Finished goods are shipped from the
Dominican Republic and other sources via common carrier to TSI's Tampa
distribution center. Quality inspections occur both before shipment to Tampa and
when the finished garments are received by the distribution center. TSI
currently employs 24 full-time quality control personnel in its Tampa
facilities. Upon confirmation of a customer order, TSI picks the appropriate
items from its common inventory, applies customer-specific tags, labels and
packaging, and prepares shipments in accordance with the customer's
specifications. TSI's advanced finished goods processing and distribution
systems enable TSI to process a customer order in less than 12 hours, if
necessary, and TSI generally ships orders within three days of receipt. The
customer pays the applicable freight charges. See "Risk Factors -- Dependence on
Independent Manufacturers."
TSI has implemented comprehensive customer order processing and shipping
procedures to enhance customer service and reduce costly customer chargebacks
for order execution deficiencies. Cartons containing garments are bar coded,
weighed and electronically sorted based on weight standards for each individual
garment. Cartons not meeting specifications are removed from order processing
for review. Approved cartons are shrink-wrapped together for delivery to
customers. As a result of these quality control procedures, customer returns
were approximately 1.2% in fiscal 1997.
FARAH
Farah U.S.A.'s operations are organized similarly to TSI's with domestic
cutting and finished goods distribution and foreign garment assembly and
finishing. Farah operates one cutting facility in the United
<PAGE> 44
States, one sewing/finishing and one finishing facility in Mexico, and one
sewing/finishing facility in Costa Rica. Farah also has a long-term joint
venture arrangement in a Mexican finishing facility with a third party Mexican
corporation. In fiscal 1998, Farah announced its intention to close its
finishing facility in Cartago, Costa Rica, reduce its sewing operations in its
San Jose, Costa Rica facility, and move production to its Mexican facilities and
independent manufacturers. Finished products are delivered to Farah's United
States distribution center for storage, customer order execution, and
distribution to Farah customers in the United States. In fiscal 1997, the
production cycle from receipt of raw materials through the availability for
shipping of finished goods averaged 60 days compared with 51 days in fiscal 1996
and 64 days in fiscal 1995. For fiscal 1997, Farah U.S.A.'s average finished
goods inventories, expressed as days of net sales, were 61 days compared to 66
days for fiscal 1996 and 82 days for 1995. In fiscal 1997, Farah U.S.A.'s
average work-in-process inventories, expressed as days of net sales, were 40
days compared to 32 days in fiscal 1996 and 41 days in fiscal 1995. In fiscal
1997, Farah U.S.A.'s average raw materials inventories, expressed as days of net
sales, were 20 days compared to 19 days in fiscal 1996 and 23 days in fiscal
1995.
IMPORTS AND IMPORT REGULATIONS
Each of TSI and Farah presently imports garments under three separate
scenarios having distinct customs and trade consequences: (i) imports of
finished goods (mostly from the Pacific Rim and the Middle East); (ii) imports
from the Caribbean Basin and Central America; and (iii) imports from Mexico. See
"Risk Factors -- International Sourcing and Manufacturing" and "-- Imports and
Import Restrictions."
For direct imports (mostly from the Pacific Rim and the Middle East),
duties on imported garments are normally imposed at most favored nation ("MFN")
tariffs rates and are subject to a series of bilateral quotas that regulate the
number of garments that may be imported annually into the United States. The
tariffs for most of the countries from which TSI and Farah currently import or
intend to import have been set by international negotiations under the auspices
of the World Trade Organization ("WTO"). These tariffs generally range between
17.0% and 35.0%, depending upon the nature of the garment (e.g., shirt, pant),
its construction and its chief weight by fiber. The principal sourcing
alternatives that do not enjoy MFN rates in the Far East are Vietnam and Laos.
In addition to these tariff rates, merchandise from virtually all the
countries from which TSI and Farah import is also subject to bilateral quota
restraints pursuant to United States domestic law or the multi-lateral Agreement
on Textile and Clothing, which is under the auspices of the WTO. Bilateral
quotas are implemented on a calendar year basis. After the United States and a
particular country agree to a particular level of exports in a particular quota
category (for instance, cotton men's bottoms (category 347)), the country that
receives the quota has the right to determine the method by which such quota is
assigned to its manufacturers. Some jurisdictions, such as Hong Kong, have a
free market under which quotas are bought and sold. Most countries, however,
assign it to the factories that actually produce the garments. Shipments which
are exported to the United States must, in addition to the usual commercial
documentation, have appropriate and official textile visas, in either an
electronic or paper format, which confirm their quota status. This documentation
must be filed prior to the admission and clearance of the merchandise into the
United States. Accordingly, TSI and Farah usually demand that this paperwork be
submitted prior to payment.
TSI and Farah also import garments from countries in the Caribbean Basin
and Central America. Although much merchandise imported from these jurisdictions
is subject to the identical tariff and quota consequences described above for
Pacific Rim imports, there are special circumstances which provide a unique
tariff and quota preference for some merchandise sourced from the Caribbean
Basin or Central America. The principal tariff advantage is the so-called "807"
program. Under this program, merchandise produced under tariff subheading
9802.00.80, HTS, is admitted into the United States with a substantial tariff
reduction. Specifically, this tariff provision provides a reduction in duty
based on the value of exported United States components assembled into a product
in a foreign jurisdiction which is subsequently reimported into the United
States. In essence, the duty reduction is equal to the value of United States
components incorporated into these assembled goods plus southbound international
freight and insurance. For apparel products, such United States components
normally consist of cut-to-shape United States fabric parts, finishing and trim
(buttons, thread, etc.). In addition, if the fabric which is cut to create the
cut component parts is also knitted,
<PAGE> 45
woven or formed in the United States, there is a special quota provision which
provides for more liberalized access to the United States marketplace. This
special quota provision is applicable only to certain Caribbean Basin, Central
American and northern Latin American countries which have signed special
agreements with the United States. Under the terms of these agreements, such
products, known in the trade as "807A" or "Super 807" or "Guaranteed Access
Level" products, are controlled through a much more liberal quota system.
Accordingly, a country such as the Dominican Republic would have a regular quota
for men's cotton bottoms produced through a normal cut, make and trim operation
or through the traditional 807 process; at the same time, it would have a much
larger and, therefore, more liberal quota for merchandise produced from United
States cloth under this Super 807 or 807A program. TSI and Farah produce
significant garments under one or both of these programs. In those circumstances
where garments qualify for both preferences, "807" and "807A," the merchandise
is accorded both quota and tariff advantage over Pacific Rim, Middle Eastern or
non-qualifying Western hemisphere goods.
TSI and Farah also import finished goods from Mexico under the North
American Free Trade Agreement, commonly known as NAFTA. Under NAFTA, merchandise
which qualifies is accorded reduced or duty-free access, depending upon the type
of merchandise selected. The key requirement for NAFTA qualification for such
garments is that the yarn, cloth, cut, sew and finish of the garments all take
place within North America. This is commonly known as the "yarn-forward rule."
Merchandise produced pursuant to these rules enters the United States at a
preferential or at a zero rate and is not subject to any quota.
In addition to the regular NAFTA program, certain imports made by the
Company are also subject to a tariff preference which was created and enacted as
part of the NAFTA-enabling legislation. This tariff provision, subheading
9802.00.90, HTS, provides for immediate duty-free and quota-free entry into the
United States from Mexico of garments made from components which are cut to
shape in the United States from United States knit, woven or formed cloth. This
duty-free, quota-free entry would be available for pant products sourced from
United States components cut from United States knitted/woven fabric. This
merchandise, therefore, has an even more favorable treatment than merchandise
being imported from the Caribbean Basin. The Company currently imports a limited
amount of such merchandise from Mexico, but Farah imports a more significant
amount from Mexico.
Finally, non-NAFTA qualifying goods may be imported from Mexico. Such
merchandise could be imported at reduced duty rates under the 807 (9802.00.80)
program (cut in the United States), or special tariff rate quotas called "TPLs."
Otherwise, it is subject to full duty. Such merchandise may also be subject to
Mexican quotas which are effective for some products until 2004.
PERSONNEL
TSI
At May 9, 1998, TSI had 730 employees, including 24 in the Dominican
Republic. Of the remainder, approximately 110 hold executive and administrative
positions, approximately 17 are engaged in design and merchandising,
approximately 385 are engaged in production (e.g., marking, cutting and
labeling), approximately 16 are engaged in sales, approximately 143 are engaged
in distribution and approximately 35 are engaged in quality control. None of
TSI's employees is subject to a collective bargaining agreement, and TSI
considers its relations with its employees to be generally good.
FARAH
As of April 30, 1998, Farah had approximately 3,950 employees. As of that
date, Farah U.S.A., Farah International and Savane Direct had approximately
3,600, 160 and 190 employees, respectively. Of these employees, approximately
460 were either salaried or paid based on sales commissions earned, with the
remainder paid on an hourly basis or on the basis of production. Approximately
125 of Farah U.S.A.'s United States employees are members of the Union of
Needletrades, Industrial and Textile Employees (formerly, Amalgamated Clothing
and Textile Union) and approximately 780 of its employees are members of a union
in Mexico. The collective bargaining agreement with Farah's United States
employees expires in February 2000.
<PAGE> 46
The collective bargaining agreement for Farah's employees in Mexico expires in
December 1998. Farah considers its relations with its employees to be generally
good.
MANAGEMENT INFORMATION SYSTEMS
TSI
TSI believes that advanced information processing is important to maintain
its competitive position. The Company began implementation of a new, integrated
management information system in the second quarter of fiscal 1998 and continues
to integrate additional functions. The Company's new management information
system, which will cost approximately $5.0 million, will include client server
based hardware and the implementation of the latest version of SAP. The SAP
software, which will include the apparel specific "AFS" component, will allow
the Company to fully integrate functions such as finance, manufacturing,
distribution and inventory management. The new system will enable TSI to
streamline information entry, enhance analytical and inventory management
capabilities, strengthen customer service capabilities and provide a better flow
of information throughout its operations.
The Company's management information systems facilitate inventory and
operating controls by providing, among other things, comprehensive order
processing, production, accounting and management information for the marketing,
manufacturing, importing and distribution functions of TSI's business. TSI has
also purchased and implemented a software program that enables TSI to track,
among other things, orders, manufacturing schedules, inventory and unit sales of
its products. In addition, to support TSI's flexible inventory replenishment
program, TSI has an EDI system through which customer inventories can be tracked
and orders automatically placed by the retailer with TSI. See "Risk
Factors -- Management Information Systems" and " -- Year 2000" and "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Impact of the Year 2000 Issue."
FARAH
Farah has implemented programs to ensure technical competence in the areas
of information systems, financial reporting, electronic commerce, order
processing, inventory control, computer controlled/assisted warehousing,
distribution, manufacturing and Year 2000 compliance. Farah is currently
migrating the business systems from an IBM ES 9000 mainframe (operating an
enterprise wide software program known as CAMP -- Comprehensive Apparel
Manufacturing Package), to an IBM A/S 400 RISC mid-range system (operating an
enterprise wide system known as ACS -- Apparel Computing System). The A/S 400
offers operational stability, responsiveness, flexibility, reduced operational
costs, increased integration for internet, data warehousing, and electronic
commerce technologies and an advanced system security. ACS offers an integrated
suite of tools to support EDI, order processing, operations planning, sales,
marketing, inventory management, and accounts receivable. The new system will
also provide interfaces with other key business systems such as the JD Edwards
financial reporting and accounting system and the PkMS warehouse management
system. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Impact of the Year 2000 Issue."
COMPETITION
The apparel industry is highly competitive and TSI and Farah compete with
numerous apparel manufacturers, including brand name and private label
producers, and retailers which have established, or may establish, internal
product development and sourcing capabilities. TSI's and Farah's products also
compete with a substantial number of designer and non-designer product lines.
Many of TSI's and Farah's competitors and potential competitors have greater
financial, manufacturing and distribution resources than TSI. TSI believes that
it competes favorably on the basis of quality and value of its programs and
products, price, the production flexibility that it enjoys as a result of its
"chassis" production concept, cutting and labeling capabilities, sourcing
network and the long-term customer relationships it has developed. The Company
believes that producers of apparel generally compete on the basis of quality,
price and service. Nevertheless, any increased competition from manufacturers or
retailers, or any increased success by existing competition,
<PAGE> 47
could result in reductions in unit sales or prices, or both, which could have a
material adverse effect on the Company's business, results of operations and
financial condition. See "Risk Factors -- Competition."
TRADEMARKS AND LICENSES
TSI
TSI holds or has applied for over 75 United States trademark registrations
covering its various brands. TSI believes that its Flyers(TM) and Bay to Bay(R)
trademarks are material to its business. Bay to Bay(R) is registered with the
United States Patent and Trademark Office. This registration expires in 2001 and
is subject to renewal. There are applications pending with the United States
Patent and Trademark Office for trademarks which include the Flyers(TM) name.
Two of these applications have been opposed. Pursuant to separate license
agreements, TSI has the exclusive rights to use (i) the Bill Blass(R) trademark
with respect to casual pants and shorts, jeans and prehemmed dress pants
distributed or sold in the United States, Mexico and Canada, (ii) the Van
Heusen(R) trademark with respect to men's pants, jeans and shorts distributed or
sold in the United States and its possessions and territories and (iii) the
Generra(R) trademark with respect to the design, manufacture and wholesale in
the United States and Canada of men's casual pants, shorts and dress slacks
(excluding open bottom construction) and men's jean-constructed bottoms made of
denim or heavy weight fabrics (excluding open bottom construction). The Bill
Blass(R) license expires in calendar 2000, and the Van Heusen(R) license expires
in calendar 1999. The license agreement with respect to the Generra(R) trademark
is subject to two renewal options that expire September 30, 2002 and 2005,
respectively. TSI believes that it has the exclusive use of all of its owned and
licensed trademarks. See "Risk Factors -- Dependence on Intellectual Property;
Risk of Infringement Claims."
FARAH
Farah owns many United States and foreign trademark registrations,
including Savane(R), Savane Elements(R), PROCESS 2000(R), Farah(R) and Farah
Clothing Company(R), and has several other trademark applications pending in the
United States and foreign countries. The John Henry(R) trademark is licensed
from Zodiac International Trading Corporation, an affiliate of Salant
Corporation, with respect to the manufacture, advertisement, promotion and sale
in the United States and Canada of men's slacks and trousers, blazers,
sportcoats and jackets, shorts and jeans. The John Henry(R) license is renewable
by Farah through 2038. See "Risk Factors -- Dependence on Intellectual Property;
Risk of Infringement Claims."
FACILITIES
TSI
TSI's corporate headquarters, cutting and warehouse facilities are located
in Tampa, Florida and are owned by TSI. In fiscal 1997, TSI completed an
approximately 110,000 square foot state-of-the-art cutting facility designed to
provide an environment that would increase efficiencies and accommodate TSI's
increasing volume. The new facility is located adjacent to TSI's administration
and distribution facility (approximately 190,000 square feet). During fiscal
1997, TSI's cutting and labeling, packaging and shipping facilities operated at
approximately 65.0% of capacity. TSI's facilities are subject to a mortgage
securing the debt outstanding under the Real Estate Loan Agreement, which had an
outstanding balance of $9.6 million as of April 4, 1998. TSI also leases
approximately 4,000 square feet of showroom offices in New York City. This lease
expires in April 2004. TSI believes that its existing facilities are adequate to
meet its current and foreseeable needs. TSI also believes its existing
facilities are well maintained and in good operating condition. See "Description
of Other Indebtedness -- Real Estate Loan" and Note 6 to TSI's Consolidated
Financial Statements.
FARAH
Farah's principal executive offices and United States distribution facility
are located in El Paso, Texas. Farah considers both its domestic and
international facilities to be suitable and adequate and to have sufficient
productive capacity for current operations. Farah leases its corporate
headquarters in El Paso, Texas. Farah
<PAGE> 48
also leases a new distribution warehouse located in Santa Teresa, New Mexico.
Relocation to the new warehouse was completed during the second quarter of
fiscal 1998.
The following table reflects the general location, use and approximate size
of Farah's significant real properties currently in use:
<TABLE>
<CAPTION>
APPROXIMATE SQUAREFOOTAGE
LOCATION USE OWNED/LEASED
-------- --- -------------------------
<S> <C> <C>
El Paso, Texas Warehouse 116,000 Owned(1)
Chihuahua, Mexico, Garment manufacturing plant 73,800 Owned
San Jose, Costa Rica Garment manufacturing plant 124,000 Owned
Cartago, Costa Rica Garment manufacturing plant 77,000 Owned
Auckland, New Zealand Office/Warehouse 9,000 Owned
El Paso, Texas Corporate offices 43,500 Leased
El Paso, Texas Garment manufacturing plant 201,000 Leased
Sydney, Australia Office/Warehouse 29,000 Leased
Suva, Fiji Two garment manufacturing plants 35,000 Leased(2)
Witham, United Kingdom Office/Warehouse 57,000 Leased
Santa Teresa, New Mexico Distribution Warehouse 250,000 Leased
Juarez, Mexico Garment manufacturing plant 73,500 Leased
Queretaro, Mexico Warehouse 32,700 Leased
Torreon, Mexico Garment manufacturing plant 25,000 Leased(3)
</TABLE>
- ---------------
(1) The facility was formerly a garment manufacturing plant. The underlying land
is leased through February 2002.
(2) The facilities are leased by a joint venture in which Farah is a 50%
participant.
(3) The facilities are leased by Farah and a co-lessee.
LEGAL PROCEEDINGS
TSI
On March 21, 1997, Levi Strauss & Co. brought suit against TSI in United
States District Court for the Northern District of California. The complaint
alleges, among other things, that TSI's Flyers(TM) trademark and certain trade
dress used in the labeling and packaging of TSI's Flyers(TM) and Bay to Bay(R)
products infringe upon certain of plaintiff's proprietary trademark and trade
dress rights in violation of the federal Lanham Act and California law. The
complaint seeks injunctive relief, as well as treble damages and attorneys'
fees. In addition, plaintiff has indicated that it believes that certain trade
dress used in the labeling and packaging of TSI's licensed Bill Blass(R) brand
dress slacks also infringes upon certain of plaintiff's proprietary trade dress
rights. Although the outcome of the litigation cannot be determined at this
time, TSI has engaged in settlement discussions with Levi Strauss & Co.
Nevertheless, in an attempt to limit TSI's liability, if any, with respect to
such alleged infringement, TSI has unilaterally altered the trademark and trade
dress which are currently the subject of this litigation.
On July 3, 1997, Out-of-Mexico Apparel, Ltd. brought suit against TSI in
California Superior Court for, among other things, breach of contract, breach of
a noncircumvention agreement, and violation of the California Unfair Business
Practices Act. The complaint alleges that TSI entered into contracts for the
manufacture of apparel with certain manufacturers in contravention of a customer
non-disclosure and non-circumvention agreement between Out-of-Mexico Apparel,
Ltd. and TSI. The complaint seeks compensatory damages and prejudgment interest,
punitive damages and the costs of suit. Although the outcome of the litigation
cannot be determined at this time and TSI would consider reasonable settlement
opportunities, TSI intends to vigorously defend against such allegations. The
Company does not believe that this litigation will have a material adverse
effect on its business, results of operations or financial condition.
On December 30, 1997, TSI brought suit against Bremen Trouser's, Inc.
("Bremen") in the State Circuit Court in Tampa, Florida seeking a declaratory
judgment that TSI has the right to manufacture and sell casual pants with
"busted seams" using the Bill Blass(R) label pursuant to a license agreement
(the "Pincus License Agreement") between the Company and Pincus Bros., Inc.
("Pincus"). Bremen is a licensee of Pincus under a separate license agreement.
In March 1998, TSI filed an amended complaint, which added
<PAGE> 49
Pincus as a defendant, alleging breach of contract against Pincus and tortious
interference with business relations against Bremen. Also in March 1998, Pincus
and Bremen filed a separate complaint against TSI, alleging, among other things,
that TSI violated the terms of the Pincus License Agreement by manufacturing
"busted seam" pants. Pincus and Bremen have sought unspecified damages and other
non-monetary relief. TSI's state claim has been removed to the United States
District Court for the Middle District of Florida and consolidated with Pincus
and Bremen's complaint. Pincus has taken the position that the Pincus License
Agreement gives it the authority to resolve disputes between the Company and
Pincus' other licensees, and it claims to have resolved the dispute which is the
subject of the litigation in favor of Bremen. No formal discovery has been
conducted. Although the outcome of the litigation cannot be determined at this
time and TSI would consider reasonable settlement opportunities, TSI intends to
vigorously pursue the litigation. The Company does not believe that this
litigation will have a material adverse effect on its business, results of
operations or financial condition.
TSI is not involved in any other legal proceedings which TSI believes could
reasonably be expected to have a material adverse effect on TSI's business,
results of operations or financial condition.
FARAH
Farah is involved in certain legal proceedings in the normal course of
business. Farah does not believe that the outcome of such legal proceedings
could reasonably be expected to have a material adverse effect on Farah's
business, results of operations or financial condition.
<PAGE> 50
DESCRIPTION OF OTHER INDEBTEDNESS
The following summary of certain agreements and instruments of the Company
does not purport to be complete and is qualified in its entirety by reference to
the various agreements and instruments described, certain of which have been
included as exhibits to various filings by TSI and Farah with the Commission.
See "Available Information."
BRIDGE FACILITY
The Bridge Facility provided for aggregate borrowing availability of $100.0
million and was fully drawn on June 10, 1998, the date the Tender Offer was
consummated (the "Bridge Closing Date"). The Bridge Facility is an unsecured
senior subordinated obligation of the Company. Payment of all amounts
outstanding under the Bridge Facility is guaranteed, jointly and severally, on
an unsecured senior subordinated basis by each domestic subsidiary of the
Company and Farah. The Bridge Facility matures on the first anniversary of the
Bridge Closing Date. As of June 10, 1998, interest accrued thereunder at a rate
of 9.7% per annum. The Bridge Facility will be repaid in full with a portion of
the net proceeds of the Offering. See "Use of Proceeds."
NEW CREDIT FACILITY
In connection with the Farah Acquisition, concurrently with the
consummation of the Tender Offer, the Company entered into the New Credit
Facility, which replaced the Existing Credit Facilities. The New Credit Facility
provides for revolving borrowings and letters of credit in an aggregate
principal amount of up to $85.0 million (the "Commitment") and permits
borrowings by, or for the account of, TSI, Tropical Sportswear Company, Inc.,
Apparel Network Corporation and Farah (each, a "Borrower"). The total amount of
(i) revolving borrowings, (ii) undrawn amounts of letters of credit and (iii)
reimbursement obligations under letters of credit, may not exceed the lesser of
the Commitment and the borrowing base. The borrowing base is defined to include
the value of the Company's inventory and accounts receivable, subject to
customary limitations. Each Borrower has effectively guaranteed on a senior
basis the obligations of each other Borrower under the New Credit Facility, and
each Borrower has granted a security interest in substantially all of its
current and future personal property to the lenders as collateral for its
obligations thereunder.
The New Credit Facility has a five-year term. In addition, subject to
certain limitations, the New Credit Facility requires that all or a portion of
the outstanding borrowings thereunder be repaid upon (i) certain non-ordinary
course asset sales by any Borrower, (ii) the issuance of any debt or equity
securities by any Borrower or (iii) the receipt by any Borrower of certain
insurance proceeds or condemnation awards.
Revolving loans accrue interest at a variable rate equal, at the option of
the Borrower to which a loan is made, to (i) a LIBOR-based rate plus a margin
which will be determined from time to time based on the Company's financial
performance (not exceeding 2.75% per annum) or (ii) the base rate (defined to
mean the higher of (a) Fleet Bank's publicly announced "prime rate" and (b) a
rate tied to the rates on overnight Federal funds transactions with members of
the Federal Reserve System) plus a margin that will be determined from time to
time based on the Company's financial performance (not exceeding 1.25% per
annum). All drawings under letters of credit which are not promptly reimbursed
will accrue interest at a variable rate equal to the base rate. Interest on base
rate loans and LIBOR loans will be payable monthly in arrears on the first day
of each month and, in the case of LIBOR loans, at the end of each interest
period. Upon the occurrence of an event of default, the rate at which interest
accrues on borrowings outstanding under the New Credit Agreement will increase
by 2.0% per annum. As of June 10, 1998, interest accrued on revolving loans
outstanding thereunder at a rate of 8.5% per annum and there were no
unreimbursed drawings under letters of credit.
The New Credit Facility contains a number of customary affirmative and
negative covenants, including, among others, covenants restricting the Borrowers
and their subsidiaries with respect to the incurrence of debt (including
guarantees); the creation of liens; substantially changing the nature of the
Borrowers' or their subsidiaries' businesses; the consummation of certain
transactions such as dispositions of substantial assets, mergers, acquisitions,
reorganizations and recapitalizations; the making of certain investments and
loans, non-
<PAGE> 51
ordinary course asset sales and capital expenditures; the making of dividends
and other distributions; and transactions with affiliates. The Borrowers are
also required to comply with certain financial tests and maintain certain
financial ratios. Certain of these financial tests and ratios include: (i)
maintaining a minimum tangible net worth; (ii) maintaining a maximum ratio of
debt to EBITDA; (iii) maintaining a maximum ratio of senior debt to EBITDA; and
(iv) maintaining a minimum ratio of earnings to fixed charges.
The New Credit Facility contains customary events of default. An event of
default under the New Credit Facility will allow the lenders thereunder to
accelerate or, in certain cases, will automatically cause the acceleration of,
the maturity of the debt under the New Credit Facility and will restrict the
ability of the Company and the Subsidiary Guarantors to meet their obligations
to the holders of the Notes.
In connection with the closing of the Offering, the Company has entered
into discussions with its lenders to obtain the Credit Facility Increase, which
the Company expects will increase the borrowing availability under the New
Credit Facility to $110.0 million, subject to borrowing base limitations.
However, no assurance can be given that the Company will obtain the Credit
Facility Increase.
REAL ESTATE LOAN
Pursuant to the Real Estate Loan Agreement, TSI obtained the Real Estate
Loan from SouthTrust to finance in part TSI's acquisition of the building and
land in Tampa, Florida which houses TSI's distribution and administration
functions, as well as the acquisition of adjacent property and the construction
thereon of an approximately 110,000 square foot cutting facility (collectively,
the "Land and Improvements"). All amounts outstanding under the Real Estate Loan
Agreement are secured by the Land and Improvements.
As of April 4, 1998, $9.6 million principal amount of the Real Estate Loan
was outstanding. The Real Estate Loan accrues interest at 7.38% per annum until
July 18, 2002 and, thereafter, the interest rate will be adjusted in accordance
with the Real Estate Loan Agreement. Accrued interest and principal payments of
$81,280 are payable monthly, with a final payment of $6.8 million due on May 7,
2006. In addition, the Company may, at its option, prepay the Real Estate Loan,
subject to certain prepayment premiums. If TSI fails to make any payment within
ten days of when such payment is due, the interest rate on the Real Estate Loan
will increase to the maximum rate permitted by applicable law.
The Real Estate Loan Agreement contains customary covenants and events of
default. An event of default under the Real Estate Loan Agreement will allow
SouthTrust to accelerate or, in certain cases, will automatically cause the
acceleration of, the maturity of the Real Estate Loan and will restrict the
ability of the Company to meet its obligations to the holders of the Notes.
FACTORING ARRANGEMENTS
Pursuant to the Factoring Agreement between the Company and the Factor, the
Company factors substantially all of its accounts receivable. The Factoring
Agreement provides that the Factor will pay the Company an amount equal to the
gross amount of the Company's accounts receivable from customers reduced by
certain offsets, including, among others, discounts, returns, and a commission
payable by the Company to the Factor. The commission equals 0.3% of the gross
amount of the accounts receivable factored. For fiscal 1997 and the twenty-seven
weeks ended April 4, 1998, the Company paid commissions to the Factor
aggregating $504,000 and $384,000, respectively.
The Factor reviews the creditworthiness of the Company's customers prior to
sales by the Company to each customer. If the Factor approves of the sale based
on its credit review, it assumes 99.85% of the credit risk for the receivables
factored. If the Factor disapproves of the sale and the Company then proceeds
with the sale, the Factor will not purchase the receivable and the Company will
bear the credit risk associated with the receivable. The Factor pays the Company
the purchase price for the receivable upon the earlier of (i) receipt by the
Factor of payment from the Company's customer and (ii) 120 days past the due
date for such payment. The Factoring Agreement expires on September 30, 1998.
The Company intends to establish similar factoring arrangements for Farah
following the consummation of the Transactions. However, no assurance can be
given that the Company will be able to establish such a factoring arrangement
for Farah on favorable terms.
